How to start a franchise

If starting from scratch seems intimidating, you could be well suited for franchise ownership. A franchise business is less complicated than starting your own. It offers a hybrid form of business model that combines aspects of sole proprietorship with those of a corporation. It is one of the easiest ways to be part of the business community and gives opportunity to aspiring entrepreneurs to turn their dreams into reality.

This article will cover the following topics:

• What is Franchising?
• Franchise and Royalty fees
• How Much Money Can a Franchise Make?
• How to Start a Franchise
• What are The Types of Franchises?
• What are the most profitable franchises?
• A cost effective way of paying your franchise and royalty fees

What is Franchising?

It is an agreement where a “franchisor” – the owner of an established business, sells its business concept and the right to own and run a business to others called the “franchisee”. Essentially, a franchisee pays an initial fee and ongoing royalties to a franchisor. In return, the franchisee gains the use of a trademark, including its trade secrets, and the right to use the franchisor's business model and sell its products or services instead of building new units on your own. The franchisor also offers various kinds of support to the franchisee, such as training and development, advertising and promotion.

Franchise and Royalty fees

Franchise fee is the one time payment to the franchisor that serves as a license to use the trade name of the business and sell its products or services.. This usually covers the cost of training, recruiting, territory analysis, site identification, specialist equipment, stationary, franchisee launch, etc.¹

Franchise royalty is the continues fee that franchisors collect on either a monthly or quarterly basis. These fees are based on a percentage of your revenue. Franchise royalties range from 4% of your revenue all the way up to 12% or more.

For these large and frequent payments, it's good to use financial services like Wise to cut the cost on international transfers and avoid poor exchange rate traditional banks charge especially if you are a foreign investor.

How Much Money Can a Franchise Make?

Under Item 19 of the Franchisor Disclosure Document FDD details the financial performance of the franchise and an overview of the average revenue a franchisee makes, however it can be also meaningless since Item 19 is optional and sometimes it is hyped.

However, according to a survey by Franchise Business Review², an average franchisee makes $70,000 a year in terms of profitability with median income data. While we look at the food and beverage sector which is the most common franchise, following the “80/20 Rule”, 37 percent in this industry earn less than $50,000 annually and just 16 percent the top performers earn more than $200,000 per year. Beyond that, it is hard to conclude since there can be major differences between concepts and industry type.

How to Start a Franchise

It’s a must to do an extensive research of the market, weigh the risk vs. reward and study the business environment, when is the best time to start and prepare a well-defined business plan. Here’s how to get started!

1. Decide where to start. Decide whether or not to venture in this kind of business. At first, it might seem that franchising has only benefits but there are some risks to consider. Some of the benefits include effective management, the speed of growth, lower risk and higher viability, and reduced involvement in daily operations. While as the downsides, it includes management difficulty, continuous royalties, strict operational guidelines and reputation risk. With these instances, you must consider all the pros and cons of buying a franchise before you engage in it.

2. Get Planned and Organized. Think carefully about how your business will work and your plan on how to enter the market. Choose a franchise that suits your personality, skills and business goals. You should also assess your strengths and weaknesses and on what industry you’d like to start. You will need precise details and strategy to get your businesses up and running. This process takes some time, but it’s worth it, this will still ultimately help your business run smoothly. From marketing to operations to financial management and even to human resource development, it all has to be executed in a thorough manner. Develop a business plan and a manual to give you a quick way to reference policies and best practices and will help you on major decisions. Find a business plan template to help you with the process.

3. Hire a Lawyer. Seeking advice from a professional is really crucial during the franchising process. For starters, you’ll need to fill out a Franchise Disclosure Document. It has a very distinct format you need to follow, and it’s important to have a lawyer to walk you through this process. You’ll need to set pricing, create a franchise agreement and determine intellectual property protection. Besides, you’ll need help if you’re diving into unfamiliar territory.

4. Choose the Right Location. What are the parameters you should consider in choosing a location that make the most sense for your business? Where do you have brand recognition already? Location is very crucial for a franchised business, especially if the market is saturated, you don’t have to put your business in major cities or central locations where the rent is too high, choose a good location with a reasonable rent.

5. Ask Support from your Franchisor and other Franchisees. At start, you’ll need support from your franchisor which is part of what you’ve paid for. You can also ask your fellow franchisees’ advice. At times, some of them may not entertain you as they may look at you as a competitor but at the end of the day there’s always someone who is willing to share their experience.

6. Find a Mentor. There will always be people who are willing to give you advice, you just need to seek them out, make friends, build acquaintances, and ask people who are like-minded, and these are the key to success.

7. Continue Learning. Learning never stops, and the best learning you can have comes through experience, you may fail at times but what important is you learn. That’s why planning is very important, you can anticipate the red flags and be prepared for it. Learn from the people you meet, read articles and books that will help you along the way, it is always written you just have to work for it.

What are The Types of Franchises?

Just like when selecting your partner, you should be extremely careful when it comes to choosing a business franchise. It’s easy to find a common business that is trendy but it can be difficult to sustain. Is it the right business for you? How long have they been in the market? Will it add value to you and your clients? Your goal is to be unique and so that is the only way you’ll ensure the viability of your business. Here are the common types of franchises that you can choose from.

1. Food Service Industry

Since the 1950's food franchises have remained the most popular mainstay in American economy and make up more than 36% of total franchises in the US.³ The most common food franchises are;

• McDonald’s – McDonald’s is the world’s largest franchise network and ranked first in Entrepreneur’s annual Franchise 500 list in 2019
• Dunkin’- a multinational coffeehouse and donut company, investment required ranges from $229, 000 to $1.7 million.
• Sonic – a drive-in fast food restaurant selling burgers, hot dogs, chicken sandwiches, breakfast, ice cream, and beverages.
• Subway – the world’s largest restaurant chain and one of the most recognized brands, with Subway you’ll get the support and experience that comes with it.

2. Business Service Providers

From retail to finance, distribution, and even to smallest businesses sector service industry works, it earns revenue primarily in providing intangible products and services.

• America’s Favorite Insurance & Tax – America’s Favorite is a property and casualty insurance agency with tax preparation services.

• The UPS Store – It is considered the world’s largest franchisor of retail shipping, postal printing, and other logistic services.

3. Convenience Stores Franchises

Convenience store franchises are growing each year in the US and it is one of the most reliable businesses because it offers speed of service to time-starved customers who want to get in and out of the store quickly.⁵

• 7-Eleven – a go-to convenience store for food, snacks, hot and cold beverages, gas and so much more, generally open 24 hours a day.⁵

• AMPM – a convenience store where you can find deals on food snacks, beverages, gas, and maybe even car wash or ATM.

4. Travel Agency

Most travel companies offer various types of travel services they usually partner with cruise lines, tour operators, and hotel accommodations.

• Cruise Planners– an American Express Travel Representatives, a franchise opportunity with no travel experience required.
• Dream Vacations – a part of World Travel Holdings which offers cruise vacations and personalized vacation packages

5. Health and Fitness.

Most people give priority to a healthy lifestyle more than just simply eating right. It encompasses all activities which promote physical and mental wellbeing. Fitness has evolved in more complex way which may include gyms with state-of-the-art equipments, yoga studios, and spas.

• Planet Fitness – a company became known as the “Judgment Free Zone” – a welcoming and friendly community where people could feel comfortable regardless of their fitness level.

• ATC Healthcare Services – one of the largest medical staffing agencies that help facilities to meet growing needs for healthcare.

What are the most profitable franchises?

From the Fortune and Entrepreneur’s Franchise 500 list⁴, here are some of the most profitable franchises categorized in High Level Investment - greater than $500,000, Medium Level Investment – between $150,000 and $500,000, Low Level Investment–less than $150,000.

• High Level Investment ( $500,000 and above)

• Medium Level Investment ( between $150,000 - $500,000)

• Low Level Investment ( below $150,000)

• Low Cost Franchises
  If you think owning a business is expensive, well think again, there are low cost franchises that offer great opportunity to investors who have limited capital. Low cost franchises have a starting franchise fee less than $50,000. Here are the top 10 most affordable franchises that will fit your plan.

  • Jan-Pro Franchising Int’l Inc. – initial investment $4,170 - $54700. Jan-Pro offers commercial cleaning services to businesses such as gyms, banks, churches, schools and other offices.⁶

  • Cruise Planners – initial investment $1,900 - $10,995. A travel company which you can start even in your own home.⁷

  • Jazzercise Inc. – initial investment $3,530 - $12,900. A fitness studio which offers dance and aerobics founded in 1969 and has more than 9,000 locations across the world.⁸

  • Stratus Building Solutions – initial investment $4,450 - $72,850. Another cleaning service which focuses on environmentally friendly solutions to meet janitorial services in offices, restaurants and other establishments.⁹

  • Chester’s – initial investment $8,640 – 296,000. A friend chicken quick service restaurant which has one of the widest ranges of initial investment depends on plan and location with a franchise fee of only $3,500.¹⁰

A cost effective way of paying your franchise and royalty fees

Once you’ve done your research and decided which company to franchise, you’d need to find a financial solution to use for paying the recurring royalty fees and the upfront franchise fee. Traditional banks might not be the best solution for this due to the poor exchange rate and high international transfer fees. You can use Wise to make sure that you always get the real exchange rate without any mark-ups. This could save you a lot of money especially in large transactions.

You can also open a multi-currency accountto hold, receive and send in different currencies which will simplify your global business transactions especially if you’re planning to open or expand the franchise overseas. The account can be synced to accounting software like Xero to ease your financial recording. This will save time and money for your local and international business.

Sign up on Wise Business today and see how much you could save!