What is a Franchise Business, How to Buy One, and Why You May Not Want To.April 29, 2022
What exactly is a franchise, why has franchising been so successful, ways to buy a franchise even if you have no money, and why you actually may not want to.
There are highly technical explanations for what franchising is and how it works let’s keep it simple. Let’s say I start a business selling pies. Bob’s Pies I do incredibly well, and eventually my pie shop is making a million dollars a year. Of course I want to expand and spread my pie love across the country, or world. But every new pie location I personally open costs me about $300,000 of my own money and a lot of time. It would be 3 million just to open 10 stores, and opening stores is not easy! I have to worry about hiring a manager for the stores, trusting a manager with the stores, finding a suitable location, and lots more. I’m also taking a lot of time away from my own pie store which could hurt my business.
Another option is to franchise the business. So me, Bob’s pies, sells the rights to people who want to open their own Bob’s pies locations in their own city.
I let them use my fancy logo, show them all my secrets from how to bake the pies, all the ingredients, where to source them, what hours to open, how to do catering and make more money, we get volume discounts by combining our purchases, everything the buyer needs to know to replicate my very successful pie business, and everything I learned over the years so they can ramp up quickly and avoid all the costly mistakes I made.
The buyer pays a franchise fee, they usually range around $30-$50,000, as well as a royalty, which is a portion of their gross sales, which might be about 6%. So if that new store also makes a million dollars, I make $60,000 a year from every store that opens. Now I dont make as much as I would if I opened it myself, but I can scale up much faster using other peoples money, and expand to 10-20-50 or 1000 locations f things go really well. At that point we can also pool our advertising dollars and launch national ad campaigns for the good of our entire franchise system.
So I benefit from getting franchise fees and royalties, I have operators with their own money invested so are likely to work harder than a salaried manager, and I can expand as fast as I can find, and support franchise owners. The people who buy my franchise get a proven system, and basically an instruction manual on everything they need to know to build a successful business just like I did. Its a win-win situation.
That is how franchising is intended to work. But the franchise model has become so successful that companies with poor business models, or no proven business model at all, who want to test their idea, with your money, sell franchises and derive income just from the franchise fees. Today, hundreds of new franchises flood the market, many of them give you a good sales pitch, will take your franchise fee, but wont give much in return. Just because a business is a franchise does not mean it is a viable business. Look for proven systems and processes either from the owners first location, or preferably from their long list of existing franchise owners. If you want to buy a franchise there are many ranging from $10k and up, and no money down 100% financed options. passive operations, owner operator, there are about 4000 franchise opportunities.
An invaluable tool for buyers in franchising is the FDD, or franchise disclosure document. Every franchise in the USA must register their FDD and provide one to a buyer by law. Many states have supplemental laws, like California and New York, and must approve your franchise before you sell in that state. In the FDD the franchise must disclose things like your estimated investment, if you need to buy product from them, and if they make a profit from selling it to you, any lawsuits or bankruptcies. Franchises can also list their earnings per store, some do and some don’t and they can list any numbers they want. Its good to see some financial data regarding what franchise owners are earning, but the franchise can choose what data they want to provide, so it shouldn’t be the end of the story.
How much do franchises actually earn? https://youtu.be/bHoezHqvMjI
A Chick-Fil-A Franchise Costs only $10,000 and Makes 4.5 Million – What’s the Catch? https://youtu.be/wv5byMsuzBE
Buy a Franchise With No Money https://youtu.be/o8IA0qTDihY