Franchising has been called one of the best ways to start your own business. With an existing brand and well-developed processes, a franchisee simply has to open his or her doors, right? Not quite. Let’s look at a few things to consider before starting down the franchise road.
What Does It Cost?
Starting into any new business is going to cost money, but many newcomers to franchising don’t realize just how much they need to invest to get started. Unlike other startup models where you can rely on a lean startup mentality, starting a franchise requires a lot of money, up front. Opening a McDonald’s, for example, can range from USD $500,000 – $1,000,000, on top of a franchise fee that is around $45,000.
Of course, there are various ways to finance these significant startup costs. Traditional small business loans from commercial banks prefer franchises with multiple locations and will require about 20% down. Here in Canada there is also the Canadian Small Business Financing Program (CSBFP). If your expected revenue is less than $5 million, they can finance up to 90% of the costs you need to get going.
While startup costs are steep, a franchise can start seeing real profits quickly. That McDonald’s that costs more than $1 million to start will generate about $2.5 million in sales every year. Not bad!
How Does it Operate?
Franchising is all about creating a consistent experience. So once you have your startup costs, you don’t have to worry about your brand, your social media, or building a website. While some would-be entrepreneurs love that about franchising, others prefer to have more creative freedom.
In addition to dictating the look and feel for your business, the company often requires that you buy your raw materials from them. This can take the hassle out of finding reliable raw materials, but it also means you have little control over your input costs and therefore a profit.
How’s the Competition?
Most franchise companies limit the number of locations in an area, so franchise owners aren’t’ competing against each other. However, in a big metropolitan area like Toronto, that area is pretty small so it’s easy to assume you’ll be competing with other franchise owners for customers and talent. And because the company limits your marketing and advertising, you don’t really have a lot of freedom to address this competition.
Competition for talent however, is a bit easier, especially if you pick a location near major public transportation stops. A franchise owner will likely find hiring easier than a startup because of the brand recognition. However, retaining talent still requires excellent leadership and management skills of you and your managers. Your business will live or die by your staff, regardless of the type of business you start.
Starting your business is exciting, scary, and full of unknowns. So watch our webinar on demand now, Franchising – What You Need to Know, to learn if franchising is right for you.