The franchise business model has over 150 years of existence in the USA. A franchise is a business model where an existing business (franchisor) enters into a contract with an individual (franchisee), allowing the latter to use the franchisor’s brand name and sell their product.
The main advantage of this business model is that you get to identify with an already established brand, making it easier for you as an entrepreneur to break even than you would when starting a new business. But, it doesn’t mean that it is by any means easy to start and run a franchise.
Consider Demand and Cost
Demand is arguably the most important thing to consider when starting a business. So before taking any step, analyze the demand for the product you intend to sell at your franchise. Identify competitors and your franchisor’s strong points. If you’re satisfied with demand, then you can go ahead to consider factors like cost.
The cost is the second thing you will need to consider when venturing into a franchise business. Buying a franchise can be a costly endeavor. Typically, you can expect to pay anything from $20,000-$50,000 in fees. For a master franchise, the fees can reach as high as $100,000.
These fees do not include the total investment costs. You still need to stock up and pay extra business fees such as royalty, marketing, and licensing fees. So, you will need to do your research first. You will also need to weigh how much you have compared to what the different franchises in the industry you want to venture in have to offer. Also, you have to account for living expenses for at least six months to allow your business to break even.
Choose the Type of Franchise Model That Works Best for You
There are two main types of franchise models to choose from. The first model is the business format franchise. In this type of arrangement, the franchisor provides almost everything from the product to the operating systems and product name, and will also be heavily involved in running the business, leaving little room for your creativity. This model can work best if you like a hands-off approach to business.
If you are imaginative and creative, you could feel limited and restrained by the model, but the second model, the product distribution franchise, could be the right pick. This model is more like a supplier-to-distributor relationship. You get to use the franchisor’s name and access their products, but the franchisor will have minimal control over the franchise’s running, allowing you to exercise creativity.
Understand the Contract
Before opening a franchise business, you will have to sign a formal franchise agreement stipulating the roles and responsibilities of either party. Before signing the contract, the franchisor must provide you with a Uniform Franchise Offering Circular (UFOC) containing disclosures such as financial statements, expenses, your obligations, and the franchisor’s obligations.
The UFOC also contains information regarding past litigations, and important details about the company.
“This document is not the terms and conditions document you get when downloading an app that nobody cares to read,” says corporate lawyer Jonathan Barber of Franchise.Law. You must read the UFOC and the contract carefully before signing. Hiring a lawyer to help review the documents is a good idea.
