Have you ever considered a franchise investment? Maybe you’re here because you’ve heard the buzzword “franchisee” and its associated success stories.
A rookie mistake is thinking buying into a franchise is a walk-in the park. It can be lucrative, but it’s not as effortless as it seems. And, buying a franchise business is not the same as building a business from an original idea.
In this guide, we’ll explain what exactly is a franchise, how to buy a franchise, and the cost of buying a franchise. Continue reading to learn more.
What Is a Franchise?
An official franchise definition is a contract that grants a franchisee (you) access to a franchisor’s (the corporation) proprietary business, allowing the franchisee to sell a service or product and operate under the corporation’s name. In exchange, the franchisee pays initial start-up costs and a monthly royalty fee to the franchisor.
Let’s give an example of the franchise we all know, McDonald’s. You might not have known this before, but 80% of the McDonald’s you enter are franchised businesses.
A franchisee(you) buys into a franchise(the corporation) with an initial start-up investment. In return, you get to run an already existing business, like an entrepreneur, except you have everything set up for you. In a sense, it is like babysitting someone else’s business.
When someone franchises a McDonald’s they pay an initial investment to the McDonald’s corporation to temporarily own and operate a McDonald’s location. The franchisee is responsible for marketing, hiring, quality control, and more.
The upside as compared with entrepreneurship is the systems are in place and the success is proven. Instead of creating everything from scratch, corporate will send you the necessary recipes, marketing materials, and training pamphlets. While success is not guaranteed, there is less risk than a traditional start-up
How to Buy a Franchise?
Step one is to research franchise corporations. Some examples are 7-Eleven, Subway, and Anytime Fitness. Do not go into franchising because you believe it to be “easy.” Like any business, it comes with its own challenges.
The next step is to apply to be a franchisee for your chosen corporations. They will require information such as your finances, work and education, and reason for interest in their franchise. Like a job application, you’ll be selected for an interview in the following step.
Once approved, you’ll need to buy or rent your location. The franchisee (you) covers all the upfront costs of rent, equipment, advertising, and employees. You’ll need to make sure you have the financing to do so.
The Cost of a Franchise Investment?
Due to all the upfront costs of rent, machinery, and more, the franchisee can expect to pay $10,000 to $100,000 just to open shop. After opening, there are monthly royalty and marketing fees paid from the franchisee to the corporation.
However, some turnkey business models have the benefits of a franchise without the upfront fees.
Returns of a Franchised Business
A franchise investment is a large one, But in the long run, it is a small price to pay for operating your own business. The median income for franchisees(after all expenses are paid) is $70,000-$120,000 annually after the first two years.
Not a bad gig for aspiring business owners! Looking for more franchise 101? Keep reading on our site!