122 Reading: Franchising
Franchising
If you want to be a small business owner but are averse to the risks of starting your own business, you might opt to buy a franchise.
Under this setup, a franchiser (the company that sells the franchise) grants the franchisee (the buyer—you) the right to use a brand name and to sell its goods or services. Franchises market products in a variety of industries, including food, retail, hotels, travel, real estate, business services, cleaning services, and even weight-loss centers and wedding services. There are thousands of franchises, many of which are quite familiar—SUBWAY, McDonald’s, 7-Eleven, Holiday Inn, Budget Car Rental, RadioShack, and Jiffy Lube.
As you can see from the figure “The Growth of Franchising, 1980–2007” below, franchising has become an extremely popular way to do business. A new franchise outlet opens once every eight minutes in the United States, where one in ten businesses is now a franchise. Franchises employ eight million people (13 percent of the workforce) and account for 17 percent of all sales in this country ($1.3 trillion) (“Census Bureau’s First Release of Comprehensive Franchise Data Shows Franchises Make Up More Than 10 Percent of Employer Businesses,” U.S. Census Bureau, September 14, 2010,” U.S. Census Bureau, http://www.census.gov/newsroom/releases/archives/economic_census/cb10-141.html, accessed August 31, 2011).
In addition to the right to use a company’s brand name and sell its products, the franchisee gets help in picking a location, starting and operating the business, and advertising. In effect, you’ve bought a prepackaged, ready-to-go business that’s proven successful elsewhere. You also get ongoing support from the franchiser, which has a vested interest in your success.
Not surprisingly, these advantages don’t come cheaply. Franchises can be very expensive, usually depending on the amount of business that a franchisee is expected to do. KFC franchises, for example, require a total investment of $1.3 million to $2.5 million each. This fee includes the cost of the property, equipment, training, start-up costs, and the franchise fee—a one-time charge for the right to operate as a KFC outlet. McDonald’s is in the same price range ($1.1 million to $1.9 million). SUBWAY sandwich shops are more affordable, with expected total investment ranging from $84,000 to $258,000. If you’d prefer teaching dance and exercise classes, you could get a Jazzercise franchise for anywhere from $3,000 to $76,000. If you don’t want to deal in food or dance, you might want to buy a dating service. The Right One® franchises go for an initial investment of $98,000 to $254,000, depending on location.
In addition to your initial investment, you’ll have to pay two other fees on a monthly basis—a royalty fee (typically from 3 to 12 percent of sales) for continued support from the franchiser and the right to keep using the company’s trade name, plus an advertising fee to cover your share of national a