Are Franchises a Good Investment?

Everyone is looking for a way to earn more money. Sometimes, people want a passive source of income and they opt for some type of investment. These usually include stocks and bonds or precious metals. Then, there are people who choose to get a second job, which can range from being a copywriter to pet-sitting. However, one can also look into franchises.

Plenty of people are looking to start their own business seeing as how they think it will be more profitable than having a regular salary. The problem is that they don’t have the funds or ideas for a completely new company. This is when they turn to bigger companies and decide to purchase a franchise.

However, a lot of individuals are not sure what this actually entails. If you’re one of them, this article is here to help you better understand franchising and its advantages and see whether it is a good investment for you. Take a look.

What exactly is franchising?

We are all probably well aware of McDonald’s which is one of the biggest franchises in the world. However, do we actually know how the concept of franchising works?

A big company can decide to sell the rights to their name, logo and business model – this makes them a franchisor. The people who purchase the rights to use these business elements are the franchisees.

When investing in a franchise business, the franchisee needs to pay a fee to acquire the rights to use the name and model, and the chance to experience all the benefits. Depending on the franchisor, the franchisee will have to pay either monthly, quarterly or annual royalty payments – usually a percentage of the gross sales.

What benefits does franchising bring?

To see whether investing in a franchise is right for you, you need to understand all the pros and cons that come with being a part of a franchise. Here are some advantages that this business move provides you with.

Using the name of a big company

Having the name and logo of a successful company is sure to bring locals who’ve heard of the brand to your store. They know the quality they can expect from your business seeing as how you are associated with a famous name known for their service or products.

Support from the franchisor

It doesn’t matter if you choose to open a bubble tea outlet or a fast food joint, the franchisors are there to guide you through the entire process and provide you with valuable knowledge that will allow you to be successful. Having support is crucial especially if you’re still new in the business and big brands know this, which is why they go out of their way to help you.

Equipment for your store

Not all franchisors are the same when it comes to equipping the space, so you need to research this topic well. For instance, some of them equip your place free of charge after you’ve paid the initial fee. Others allow you to rent the necessary equipment from them and some of them come up with a purchase plan which will let you have all the equipment you need. All in all, they usually help with managing the costs of furnishing the premises.

Hiring, training and HR support

In addition to having a recognized name which can attract employees, the franchisor is likely to help you with the hiring process as well as staff training. They will provide you with a manual on how to handle all potential scenarios and how to make the right choices in certain situations.

Are there any downsides to franchising?

However, as is with all investments, you have to consider the risks involved in order to make the right decision. Here are some downsides to buying a franchise.

Potentially high fees

We already mentioned that you need to pay an initial fee in order to acquire the rights to use the franchise name and logo. However, how high this fee is depends on the franchisor. For instance, McDonald’s requires you to pay $45,000 for a license that lasts 20 years. Taking into account certain factors, to get a McDonald’s franchise up and running, one might spend anywhere up to $2.2 million. Plus, one cannot neglect the royalties they will have to pay every year. This is not something everyone can afford, so if you don’t have enough money saved or cannot get a loan, you might want to reconsider this endeavor.

Unexpectedly low personal income

It is important to understand that not all of the profit a business makes goes straight into the franchise owner’s pocket. Before anything can be considered personal income, the owner has to pay all sorts of taxes, from local to state and federal. If they took out a loan, payments have to be made and other debt settled. Furthermore, one cannot overlook the expenses of rent, maintaining the equipment and giving the employees their salary. This often results in a personal income that is lower than expected.

Lack of creativity

If you’re looking for a company that will let you express yourself creatively, turning to a franchise might not be what you need. Franchises are known for their uniformity in everything from the employees’ uniforms through the store décor all the way to the products which they offer. Following these rules is something that will be expected of you as well. There might be a situation where your opinion will be taken into consideration in order to improve the future of the whole franchise, but these moments are quite rare. Make sure you understand what your contract expects of you because you do not want to regret this decision later on.

As you can see, there are both good and not-so-good sides to buying a franchise. You will get guidance and a model which you can use to succeed, but you might earn less than you expected and will lose some creative control. You need to understand your needs and wishes and decide whether taking this leap makes sense for you.

Lucas Parker is a business consultant with a passion for writing. Doing his research, exploring and writing are his favorite things to do.  Besides that, he loves playing his guitar, hiking, and traveling.