Franchises are a significant part of the economy in the United States, which is evidenced by the fact that in 2010, over ten percent of employer businesses were owned by a franchisee.
Franchises may seem like the perfect idea for starting a business, as they ostensibly minimize risk– you are selling a brand that is established, in most cases– and require much less creative thinking than a startup. However, franchises do have their own costs, both readily evident and hidden, which this article will discuss.
During a franchisee’s first year, the startup costs can be astronomical. Even just the planning to purchase a franchise can cost a significant amount of money. Extensive research must be done, along with capital management and a business plan.
Nevertheless, let’s start with the costs of some of the more common fast food franchises. A McDonald’s franchise, for example, requires $750,000 in non-borrowed personal resources to open up a new location. A Subway is cheaper, but still expensive: it will require $131,000 to $278,000 in an initial outlay, in addition to eight percent in royalties and 4.5 percent in advertising fees. (Incidentally, an average Subway location brings in significantly less gross income than a McDonald’s in any given year.)
Many fast food restaurants require their franchisees to have a certain net worth. For example, Wendy’s requires its franchisees to have a minimum net worth of $5 million, along with at least $2 million in liquid assets.
It should be mentioned that certain franchises, such as Dunkin Donuts, are almost completely franchised, while other restaurants fall onto the other side of the spectrum, if they franchise at all.
What You Aren’t Told
In addition to the high startup and maintenance costs, there are other costs and drawbacks to franchises that aren’t mentioned by franchisors to franchisees.
Although franchises generally have a lower rate of failure than startups, only 20 percent of franchises stay in business for ten years or longer, according to the Wall Street Journal.Another discouraging figure is the fact that only 11 percent of franchisees have a pre-tax income of over $150,000.
Although it won’t often be an issue for those with a high net worth, you will need good credit to be able to afford a franchise if you lack the capital resources. Fortunately, if banks don’t want to lend to you, there are options such as microloans.
Franchises can be a great option for starting a new business, but they have become too idealized in the minds of many. Be realistic and know what you’re getting into with any given franchise– each is different– and you should be fine.