Many people dream of owning their own business. It can be one of the most exciting and rewarding experiences imaginable. It can also be one of the scariest. Starting a business from scratch — whether it be a restaurant, a clothing store, or a sports training facility — is time consuming, full of unknowns, highly demanding of time and resources. Fortunately for many entrepreneurs, those seeking to become business owners in one of the many growing business segments, franchises are an option. If you are one of these entrepreneurs, you may be asking yourself any of these questions:
- Are franchises a good investment?
- Are franchises worth the effort?
- Are franchises profitable?
In the following sections, we’ll take a close look at the ins and outs of franchises to help you decide whether or not franchising is the right business step for you.
What is a Franchise?
Investopedia defines a franchise as:
A franchise is a joint venture between a franchisor and a franchisee. The franchisor owns the original business. It sells the right to use its name and idea. The franchisee buys this right to sell the franchisor’s goods or services under an existing business model and trademark.
Simply put, a franchise is an independently owned business that operates as a licensed representative of the parent company or organization. This helps ensure consistency across all locations, builds brand identity, and grows the overall company.
We are surrounded by franchises in a variety of market segments. Most Americans patronize franchises on a daily or weekly basis. Most have minimal knowledge as to exactly how franchises function, or whether or not franchises are a good investment for people seeking to own their own business. Let’s get to the core of the matter.
Comparing Apples to Apples (sort of) — Franchise vs Startup
Starting a new business, of any type, is a big deal. While there are numerous business segments that have both independent and franchise models, we’re going to focus on the restaurant industry. Independent startups and franchises both have their pros and cons, and come with significant investment of time, money, and risk. Examining these elements will help you determine if a franchise is worth it, and more importantly, if a franchise is a good investment for you.
Start Me Up.
Most likely, we’ve all been there when a colleague or friend has just polished off the last of your secret recipe appetizers and said, “You should sell these. You’d be a millionaire in a week.” Well, maybe it didn’t happen exactly like that, but nevertheless, the floodgates open and you get the bug. “Yes, I can do this,” you tell yourself, “I’ll open a restaurant!” You’ll finally be your own boss and be as creative with your marketing and menu as you want. You’re off and running. Then, you discover some of the caveats of opening an independent restaurant.
- State and local codes, licenses, real estate restrictions
- Up front expenses, rent, marketing, branding
- Drawing in customers and keeping them
- Labor costs, supply chains, long hours
- Risk of failure (up to 30% of independent restaurants fail in the first year)
Don’t panic, your dream of being your own boss in the restaurant industry is not dead.
Franchise Me, Please.
You can still have your own restaurant without so many of the unknowns, headaches, and up front work, thanks to franchising. There are still risks with franchising, as there are with any business, but they’re diminished due to the way franchising works. The proven business models associated with franchises are often what makes franchises a good investment, and more importantly, what makes franchises profitable. There are a number of other key factors to franchising that make them more desirable, to many entrepreneurs, than independent startups. Here are a few:
- Franchises are proven, repeatable business models
- Franchises provide leverage in regard to choosing a location, establishing supply chains, and generating marketing content
- Franchises are turnkey businesses — they’re ready to go from day one
- Franchises offer existing brand recognition and established customer bases
- Franchises have access to a successful support system and training based on a tested and proven business model
- Franchises have a higher rate of success and fewer risk factors versus independent startups
- Franchises have a lower failure rate (less than 10% on average) than independent startups
- Typically, franchises are profitable much sooner than an independent startup
Arguably, it’s the efficiency of a proven, repeatable business model that makes franchises a good investment, and helps franchises be profitable. Franchisors are highly invested in the success of each franchisee and offer well-developed advice, mentoring and best-practice resources. Prospective business owners will also have a deeper understanding of actual startup costs with franchising via the Franchise Disclosure Document (required by law), which contains vital information about the company, financials, and other key elements.
The Verdict Is Yours
There’s a lot to consider when trying to decide if a franchise is a good investment for you. It’s true that sometimes there are up front costs and fees to starting a franchise, but the resources, brand recognition, established business model, and lack of guesswork really make it worth it for the savvy entrepreneur. Most franchises are successful when the blueprint is followed, with around half of all franchisors reasonably expecting 10% or more in growth annually. That fact, alone, may make a franchise worth the investment to many, but ultimately, that decision is up to you.
