Owning a Franchise Doesn’t Mean Living on Easy Street
If you’re thinking about getting into business for yourself, buying one is a smart way to go about owning a franchise. Many potential franchisees look at the franchise model of the golden arches—the “gold standard” for franchise success in American business. McDonald’s fast food restaurants are everywhere, and not just in the U.S. There are franchises in countries all over the world. By far, this is the greatest franchise success story in history.
But if you haven’t heard already, owning your own business is hard work. Owning a franchise is the same, so don’t think of it as way to make money with little effort.
Don’t get lazy
When you sign a franchise agreement, it doesn’t mean you’ll be able to sit on your yacht and watch your bank balance rise. As a franchisee, you’re still an entrepreneur—with all of its rights and privileges.What are those, you ask? Well, a franchise is still a business, and all businesses require a lot of effort to be profitable.
Some prospective business owners are under the impression that owning a franchise will mean they’ll be living on easy street and that it’s an easy gig. They think that the franchise does everything for the franchise owner. That’s why you pay the up-front fee and send them royalty checks, right?
Not so. People have misconceptions about how franchises operate and the relationship with the franchisor. We’ll examine some of the biggest misconceptions of owning a franchise that business advisors like Andrew Rogerson see when assisting clients in the Sacramento region.
1. Marketing and advertising is handled for me.
One of the best benefits of being a franchisee is the advertising. Again, if you see this of the fast food burger shop mentioned above, you know that such an established franchise will conduct large advertising campaigns to help attract customers to the franchise. You sing their jingles and know their catch phrases. That promotion is part of the deal you make with the franchisor. You pay your monthly royalties and some of that payment helps defray the cost of running print, television, and radio advertising. The exact numbers are detailed in your franchise agreement.
This looks like a good deal for you—and it does get the word out—however, it actually benefits the franchise branding more than it does for you as a franchisee. Typically, a franchisee has no input on the advertising campaigns, so if you have a special promotion for your location, it won’t be highlighted. As a result, you may have to spend more money to create your own advertising campaign in order to generate more attention for your specific location. In addition, you’ll need to put some energy into locally targeted social-media marketing and website marketing. The franchisor most likely has a website, but you need to have one for your franchise. The same thing with other social media like a Facebook page for just your store.
So when you think about a purchasing a franchise, experts like Andrew suggest that you budget for expenses such as additional advertising and marketing beyond what’s mentioned in the franchise agreement.
2. When owning a franchise success is automatic.
While a franchise like McDonald’s is an established brand, there’s no automatic success guaranteed to the franchisee. You’d be tempted to believe that this is the case when you see franchises in around Folsom or Davis doing well—such as a restaurant chain or a health club, but this is a major misconception. Thinking this way can cause you to have unrealistic expectations for your franchise.
In some situations, franchise locations will close. In fact, they close all the time, many of them due to a lack of profit. Even some of the most successful and flourishing franchises can close because of unprofitability (Yes, even McDonald’s!). This can be due to a variety of factors like the franchise location, the management team, or the franchisor’s financial and legal issues. Another reason for a franchise closing is that the franchise might not be as established as you think. If so, your expectations (and what’s in the franchise agreement) won’t be met.
As a result, it’s critical to work with a business advisor to thoroughly research a franchise prior to entering into an agreement. Andrew knows the business climate in all areas of the Sacramento region, whether it’s Roseville or Cameron Park. He’ll be able to tell you which franchises are successful, what prior franchisees say, and what’s been tried before and where.
3. Saying goodbye isn’t a big deal.
Well, in fact, it certainly can be a big deal, perhaps even a major losing deal for you. You see, closing up a business can be much more difficult than it appears. There are a host of legal and financial issues that need to be addressed. You may also need to add in the logistics of moving all of your inventory and settling in a new location.
With franchising, if you decide to close, you don’t have the luxury of just walking away. Most franchise agreements will hold you liable for payment of royalties to the franchisor for the duration of the contract. Just because you’re not making any profit doesn’t mean that you’re off the hook for paying your percentage of revenue pursuant to your franchise agreement. It’s common for franchise agreements to require a minimum royalty payment—regardless of your actual revenue.
On the other hand, there are instances when the franchisor opts not to renew your agreement.
So, as you can see with franchising, you need to think about the same issues that you would if you owned the business outright. There are pluses and minuses to owning a franchise, just like when you start-up on your own from scratch. There might be easy living with a franchise, but not until you’ve put in the work to make it successful! (Even then, you have to keep it that way!)
When you purchase an established brand it’s no guarantee that you’re buying its profitability. It’s really up to the franchisee to make it successful.
Andrew is a business expert and has negotiated hundreds of business transactions in cities throughout the Sacramento Region. He’s worked with business owners and helped to set up franchises in Citrus Heights, Rancho Cordova, Folsom, Elk Grove, Roseville, Rocklin, Davis, El Dorado Hills, and Cameron Park. Andrew can help you with deciding on an appropriate franchise and location in the area.
Spend some time talking with professional business broker Andrew Rogerson. He knows about franchises and businesses in the Sacramento area. Please visit our website services. You can also get in contact with Andrew via email or call him at (916) 570-2674.