Cosmetics

Should I buy a franchise?

Franchisee = Entrepreneur?

An entrepreneur is not just someone that has turned a new idea into a business.  An entrepreneur can also refer to a franchisee, “an individual who purchases the rights to use a company’s trademarked name and business model to do business” (http://franchises.about.com/od/franchiseglossary/g/franchisee.htm). Although a franchise may require quite a bit more capital than starting a business from scratch, the rate of return is generally higher and occurs much quicker.

There are several reasons to buy a franchise:

1. 1 out of every 12 retail stores is a franchise.
2. The cumbersome process of creating a business plan, marketing plan, and financial plan has already been done by experts in the industry.
3. The purchase is all inclusive; the infrastructure, the customers, suppliers, employees, equipment, and systems as well.
4. May receive good insight and advice from previous owners.
5. Lenders are more likely to finance a business with a proven track record.
6. Profitability is not in question as it would be in a startup.

There are drawbacks to becoming a franchisee as well:

1. Extremely high start-up costs.
2. Most franchisees must make royalty payments to the franchisor each month based on a percentage of sales.
3. Many franchisees are obligated to make regular contributions to the franchisor’s advertising fund.
4. Most franchisors impose price, appearance, and design standards, limiting control over how the franchise is operated.
5. The franchisor has the right to terminate your agreement if the franchises standard operating procedure is violated in any way.

Cost

The two costs that are the most surprising to the prospective franchisee are the Franchise Fee and the Royalty Payment.  The Franchise Fee is the one time and often non-refundable start-up fee.  This will most likely be the highest of any fee you will pay and can range from $500.00 to well over $1million.  The second major cost, the Royalty Payment, is a recurring fee that is a percentage of your gross monthly sales. Most of the larger well known franchises have monthly minimums for this fee that can impair profitability during slow seasons. 

How do you select the type of franchise to buy?

1. Know your financial capability.  Know the franchises capital requirement.
2. What do you like to do?  Match the franchise category with what you love.
3. Speak to a franchise representative.  They are the first point of contact for all inquiries and can answer any question a potential franchisee will have.

Once you have all questions answered and have narrowed down the franchise(s) you are interested in, you will complete a formal franchise application including a credit and background check.  Once you are cleared to move forward, by law the franchisor is required to send you a Franchise Disclosure Document (FDD).  The FDD will include information on the franchise that will assist in your decision making process such as: history of franchise and its key management, financial statements, litigation, franchise openings/closings/terminations, franchisee contacts, franchise agreement, requirements, and more. Source: www.franchise.com 

Here are some well known franchises available for purchase that have made Entrepreneurs Top 10 list for 2009:

America’s top franchises from Entrepreneur’s Franchise 500

1. Subway
2. McDonald’s
3. Liberty Tax Service

4. Sonic Drive In Restaurants
5. InterContinental Hotels Group
6. Ace Hardware Corp.
7. Pizza Hut
8. UPS Store, The/Mail Boxes Etc.
9. Circle K
10. Papa John’s Int’l. Inc.

Top franchise opportunities you can run from home

1. Jani-King
2. Jan-Pro Franchising Int’l. Inc.
3. Servpro
4. ServiceMaster Clean
5. Snap-on Tools
6. Stratus Building Solutions
7. Matco Tools
8. Jazzercise Inc.
9. Vanguard Cleaning Systems
10. Bonus Building Care

 Top franchises you can start for less than $50,000

1. Instant Tax Service
2. Jani-King
3. Jan-Pro Franchising Int’l. Inc.
4. Kumon Math & Reading Centers
5. ServiceMaster Clean
6. Merle Norman Cosmetics
7. Stratus Building Solutions
8. Jazzercise Inc.
9. Vanguard Cleaning Systems
10. RE/MAX Int’l. Inc.

Fastest-growing franchises from the Franchise 500

1. Jan-Pro Franchising Int’l. Inc.
2. Subway
3. Instant Tax Service
4. Stratus Building Solutions
5. Snap Fitness Inc.
6. Dunkin’ Donuts
7. Jazzercise Inc.
8. Bonus Building Care
9. Anytime Fitness
10. Vanguard Cleaning Systems

If you are concerned about the franchise fee, royalty fee and initial investment, here are a few examples of some well-known franchises:

 Subway:

Total investment: $78.6K-238.3K

Franchise fee: $15K

Ongoing royalty fee: 8%

McDonalds:

Total investment: $950.2K-1.8M

Franchise fee: $45K

Ongoing royalty fee: 12.5%+

Liberty Tax:

Total investment: $56.8K-69.9K

Franchise fee: $40K

Ongoing royalty fee: Varies

If you can imagine purchasing the rights to a well known company’s name, getting access to expert training, experiencing a proven revenue stream and unwavering brand recognition then the decision boils down to three simple questions; Do you have the capital? Do you want access to a proven business model?   Are you willing to give up significant control in how you do business?  If you’ve answered yes to all three, it’s time to seriously look into becoming a franchisee.

About the Author

Dawn Moiré Williams is president of The M.I.L.E., Management Institute of Learning Excellence, adjunct professor at Virginia College, a freelance writer, and senior auditor for a large hospital management company. She received a BS in management from Hampton University and a MBA from MTSU. A resident of Nashville and native of Los Angeles, she is a wife and mother of two boys. Contact her with questions regarding management training, career counseling or article information at dawn@milesofsuccess.com

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