How Much To Buy Into A Franchise [BEST]
One of the best ways to start a new business is by capitalizing on a franchise opportunity. Not only do franchise opportunities come with premade marketing collateral and high brand awareness, but you get extensive business support from the franchiser.
how much to buy into a franchise
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When was the last time you made a fast food stop or purchased a cup of coffee before work? If the brand is recognizable and has multiple locations throughout your city or town, like McDonald's or Dunkin', it's quite possible your favorite food joint is a franchise.
In fact, the US Census reports that 11.4% of all businesses in the US are franchises. While restaurants make up the bulk of franchise opportunities, gas and convenience stores, car dealerships, fitness, real estate, and hospitality sectors also make up a sizable chunk.
Determining the profitability of a franchise isn't an exact science, but there are a few factors to consider, including the unit growth, new franchisee success rate, and the franchiser's financial statements.
7Eleven, for example, flies accepted franchisees to their support center in Dallas for training. They also have a resource center with seminars and events. Not all franchisers, especially small ones, will have extensive resources like 7Eleven, but make sure they offer basic training.
Popeyes is consistently one of the top franchises to own in Entrepreneur's Franchise 500 Rankings. It's a well-known fast-food brand with a global presence, strong advertising strategies, and well-developed core philosophies.
Great Clips has been in business for 30 years and provides its franchise owners with up-to-date technology and training. It has invested heavily in market research to provide customers with the best service and experience.
This quick-service restaurant brand has been around for 50 years and has developed financial stability and brand recognition. It has a proven operating system and gives you access to restaurant resources and a community of more than 350 franchisees who know the business.
Ace Hardware exudes a local feel, which starkly contrasts the big-box home improvement stores like Home Depot and Lowe's. This franchise prides itself on stellar customer service and store-brand products.
The initial investment in a franchise can be pricey, and range anywhere from a few thousand dollars to over a million. If you're looking to purchase a franchise at a lower price point, there are options for you in a variety of industries.
JAN-PRO is a commercial cleaning franchise whose clientele is other businesses. They offer three options for franchising: international master franchise, executive business, and home-based opportunities.
If you're looking to start a low-investment, exercise business, a Jazzercise franchise might be a good fit for you. It offers various price points to begin a franchise and you can find the one that aligns with your budget.
This bakery is unique because, despite being a franchise, it has a "Mom and Pop shop" feel. There are locations across the United States, and its cakes have been featured in popular media outlets like Food and Wine Magazine, Food Network "Unwrapped", and Franchise Times.
Soccer Shots is a children's soccer program with a focus on character development. It has a low overhead cost, supports its franchisees, and has well-established relationships with national brands like Adidas and the U.S. Soccer Foundation.
That does come at a premium cost, such as franchise fees and ongoing royalties paid out to the franchisers. However, you will see a high return-on-investment once new customers begin walking in almost immediately after opening the location.
In addition to dictating how your business runs, franchises also lack autonomy when it comes to finances. Your franchisor will most likely control all aspects of the franchise's financial dealings. Be prepared to routinely submit financial statements such as your balance sheet and income statements.
In addition to startup costs, franchise owners should budget funds for reinvestment in the business and other fees stipulated by the franchisor. These additional costs can come in the form of training fees, royalty fees or other services like advertising.
First up, make sure that you have a good enough credit score to qualify for loans. Having a savings account is also essential. Keep in mind that some franchisers could require you to pay for the up-front fee without a loan. For that reason, you should consider franchises that accommodate your unique financial situation.
Small business loans are an excellent option for covering your franchise fee and up-front investments. Depending on your financials and your lender, you can qualify for hundreds of thousands of dollars, which will more than cover you during the setup phase.
Entrepreneur.com issued its 2021 Franchise 500 Ranking, listing the investment cost range for each of the 500 most popular franchises. Check out the list to find a franchise that interests you. But to give you an idea what the investment is, here is what it looks like for the top 10 franchises:
As you can see, the initial investment in the top 10 franchises runs from a low of $38,000 to a high of $2.6 million. Even within the same franchise, there can be a wide variation from low to high investment. That likely has to do with the favorability of a particular location, as well as the cost of real estate in a specific city or neighborhood.
Yet another article from Entrepreneur.com reported an average profit of $82,033 on restaurant franchises. This includes profits of over $250,000 on 7% of operations. That information is from 2013, but reliable information is scarce.
The franchisor is required to furnish the franchisee with a document known as a Franchise Disclosure Document (FDD). It spells out the specific terms of the franchise agreement, including the obligations of the franchisor and the franchisee.
The franchisor may provide information on the financial performance of the particular franchise outlet, and they must provide audited financial statements for the past three years. However, such information will not be available with an upstart operation.
Franchises are a good investment if you have knowledge about a particular sector and want to create an asset that generates cash flow. However, franchise investing typically requires considerable upfront capital, which is one massive barrier to entry. Additionally, unless you have the funds and knowledge to outsource every aspect of management, you'll have to get involved.
This is why most successful franchise owners have experience in the field their fanchise is in. For example, it might be a poor idea to purchase a Taco Bell franchise if you've never had any experience in food service management.
There are exceptions, of course, but generally a franchise begins as an active investment until it becomes more passive over time. And some companies, like Chic-fil-A, are known for being incredibly hands-on and selective with the franchise partners it accepts.
Thankfully, crowdfunding platforms are making it easier to invest in franchises passively if that's your goal. For example, platforms like FranShares are launching franchise funds that only take $500 to invest in, similarly to real estate crowdfunding sites.
Many of the more well-established franchises require you to go through extensive training. They may even provide on-site personnel to help you get the business off the ground. You also have to staff the business, since they typically require that multiple positions be filled.
With some franchises, like restaurants, you may be open for business either 24 hours a day, or something like 6 AM to midnight. That will require a lot of staff. You not only have to hire and train them, but also manage them on a regular basis.
This can be an excellent strategy if you have the capital to invest, but lack expertise. You can partner with someone who has extensive experience in that particular business, and maybe even with that specific franchise. The manager will collect a salary, and either bonuses or a small percentage of the profits, while you collect most of the profits.
If you struggle with marketing and if you are unsure of where to start when it comes to a business, a franchise might not be a bad idea. This is especially true if you feel overwhelmed by all the processes. A franchise that provides you with step-by-step setup help and continuing support can be a good choice.
On top of that, you will need to pay money to the franchiser. You have to raise the capital to buy the franchise, to begin with (some franchises cost more than others) and you will have to pay royalties to the franchise every year. It's possible to be required to pay in excess of $500,000 just to secure a franchise; you'll probably need a loan for that. Then, there is the yearly fee paid to keep your franchise active. If you make a lot of money, this isn't a big deal. But if can't turn a profit, this becomes problematic.
*This is historical representation of what some of our franchisees have earned as described further in Item 19 of the FDD. Same-store sales growth compares net sales (gross sales minus discounts and refunds) in calendar year 2020 to net sales in calendar year 2021. This information is based upon 217 locations that were open during the entire 2021 calendar year and provided complete information. Of these 217 locations, 112 (or 51.61%) of them had Same-Store Net Sales Growth Over Prior Year that met or exceeded 24.32%. Your results may differ. There is no assurance that you will sell or earn as much. See Item 19 of the FDD for more information.
**This is historical representation of what some of our franchisees have earned as described further in Item 19 of the FDD. This information is based upon the top 43 of 172 Drive-Thru Kiosks that were open during the entire 2021 calendar year and provided complete information. Of these 31 Drive-Thru Kiosks that compile the top quartile: (1) 17 of them (or 40%) had an AUV that met or exceeded $1,179,980, (2) 19 of them (or 44%) had a Net Profit Margin and EBITDA that met or exceeded the average. Your results may differ. There is no assurance that you will sell or earn as much. See Item 19 of the FDD for more information. 041b061a72