20 Sep 2018
September 20, 2018

Is a Franchise the Right Move for You?

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Many would-be entrepreneurs wonder what it might be like to open a franchise. There are hundreds of possibilities, each with its own policies and minimum investments, but let’s consider one of the most famous. Imagine you’re opening your own McDonald’s; you have to buy a McDonald’s franchise. For a conventional franchise, you have to have — not borrow — $250,000, which means cash, investment securities, vested profit sharing, and/or business or real estate equity. Your total costs to open the restaurant will be anywhere from $685,750 to $1,504,000 for the building and equipment. Forty percent of this has to be from your own nonborrowed funds.

An initial fee of $45,000 gets paid directly to McDonald’s. Other money goes to suppliers, so consider this part of your upfront fee. You’ll then be trained for nine months on the McDonald’s way: standards for quality, service, and value, and formulas and specifications for menu items, as well as methods of operation and inventory control techniques.

You’ll have to agree to operate the restaurant from a single location for 20 years — this is the standard franchise license, an authorization granted by the company enabling the performance of specific commercial activities. And you’ll have to follow guidelines for décor, signage, layout and everything else that makes McDonald’s McDonald’s.

In addition to monetary capital, significant human capital is required in the form of business planning and accounting skills, as well as customer service experience.

The franchise model has led to years of profitability, growth and risk mitigation for the company, which receives a royalty based on a percentage of sales. But there still are risks; you have to remain aligned with the firm on operating, promotional and capital-intensive initiatives. You have to project a brand image consistent with the company’s values. Of course, you take advantage of the millions the McDonald’s company spends each year on advertising.

Consider the Whole Story
Many people think that buying a franchise is a sure way to become a millionaire, and a lot of people become successful running a McDonald’s. However, consider all the details. Royalty fees put a serious damper on your take-home pay. After your first 20 years, assuming the company agrees to renew the contract, you pay another $45,000 franchise fee. The total monetary layout to open a McDonald’s franchise can range anywhere from $500,000 to $1.6 million. Each year, franchisees must pay a fee equivalent to 12.5 percent of sales, meaning you’ll always have two partners: Uncle Sam and company headquarters.

Subtract payroll, food costs and taxes, in addition to the royalties, and you’ll see that this isn’t an assured life of luxury. You also have to buy raw materials directly from the company or a supplier they specify.

Some franchisers, like Lawn Doctor, for example, will finance franchise fees, startup costs, inventories and equipment to get their franchisees started.

The biggest minus for many people is lack of individual creativity — uniformity is demanded in everything, including uniforms the employees wear. This can mean a bleak existence for a person who likes to be creative. But if it suits your personality, a franchise may be just the ticket. If you are able to make one location work, you’ll probably add multiple locations —Businessweek says the average is six. It would be extremely difficult to start your own restaurant chain from scratch!

Running a franchise is a serious decision and should be made with care. Learn as much as you can about the franchiser, its products and the city or town where you are looking to set up shop. Even a great product and a great location won’t guarantee a healthy bottom line. Make sure you’re aware of the pitfalls before you sign.