The Basics of Making Money in Franchising

Before you go from employee to boss, understand the financial benefits of buying a franchise.

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By Entrepreneur Staff

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The following excerpt is from franchise expert Mark Siebert's book The Franchisee Handbook. Buy it now.

For as long as you can remember, you've dreamed of business ownership. After narrowing down your list of potential franchise concepts, you're finally ready to transition from employee to boss.

Before you make the jump, spend some time running the numbers and understanding the financial benefits of buying a franchise.

After all, one of the biggest advantages to franchises is they can be less expensive to open than independent businesses — even though you have to pay a franchise fee of $25,000 to $50,000 or more.

As a first-time franchisee, here's what you need to know about making money in franchising.

Related: Considering franchise ownership? Get started now and take this quiz to find your personalized list of franchises that match your lifestyle, interests and budget.

The basics of franchising

Think of franchising as a means of expanding a business that is already highly successful. Franchises succeed where new businesses fail for a number of reasons — the most important of which is that they are using proven business systems to market proven products or services.

That said, franchisors have made many of the mistakes and subsequent course corrections that will allow you to avoid costly errors during the crucial startup phase.

Franchises are systems that have been tested and refined. And gaining access to that system gives you, as a franchisee, the ability to start faster, reduce your initial investment and avoid mistakes.

Before you open your doors for business, most franchisors will provide initial training on every aspect of the business — from finding a site and build-out to hiring and training your team, serving your customers and managing your business. And for most franchisors, that training is just the start.

Other startup support can be similarly valuable. For instance, knowing what inventory to stock can make a huge difference in cash flow during the critical early months. Or perhaps identifying what equipment to purchase, and at what price and terms, can have an enormous impact on efficiency and profitability.

Franchisors can help franchisees avoid mistakes in dozens of areas, including:

  • The right mix of products or services
  • Appropriate pricing
  • Effective advertising media selection
  • Compelling messaging
  • Vendor selection and negotiation
  • Labor management

Moreover, the franchisor will generally provide ongoing support — in the form of phone support and a field representative who will visit periodically — as both a business coach and to ensure you and the other franchisees in the system are living up to the brand standards that made the concept successful in the first place.

Related: Busting Franchising Myths and Choosing the Right Opportunity

Cost benefits of franchising

As a franchisee, you'll know precisely what inventory to buy and what equipment to lease. And you'll probably get better prices due to the franchisor's ability to purchase in volume and pricing arrangements with suppliers.

You'll also learn how to promote your business without spending your time and money on advertising that doesn't work. You'll be able to control your startup costs and avoid mistakes that could cost tens of thousands of dollars. Furthermore, you'll benefit from the franchisor's experience in various ways that will help you reduce expenses while increasing revenue.

The franchisor has already assumed many expenses that you as a franchisee will not have to undertake, such as:

  • Registering its trademark
  • Designing a logo
  • Developing a brand website and consumer advertising materials
  • Developing basic merchandising schemes
  • Establishing supply chain relationships and negotiated discounts

Bottom line: In many franchise businesses, you'll probably be cash flow positive sooner than your nonfranchise counterpart, despite paying a franchise fee. This is especially likely if you're a first-time business owner. So while your startup costs may be increased by the franchise fee, they will often be much lower overall.

Similarly, while your operation will be burdened with having to pay the franchisor an ongoing royalty, you will gain the support, established systems and brand recognition provided by the franchisor.

Many franchisors will have developed strong, proven marketing campaigns that you can use to leverage their already established brand. They may have better buying power, again saving you substantial expenses. And for some franchisors, the ability to secure national accounts on your behalf may provide additional benefits.

Related: The 4 Biggest Myths About Franchising

Staying power

When it comes time for you to sell your business, a franchise may command a higher price. If you were thinking of purchasing a business and had your choice between a McDonald's and Joe's Burgers, if all other things (like profitability) were equal, which would you rather purchase?

Let's think about it: While buying a McDonald's doesn't guarantee that you would earn money, it's likely the handoff to a new owner will be easy. That's because McDonald's has the operational manuals and expertise to help you ensure a smooth transition. Plus, McDonald's patrons know what to expect out of any McDonald's restaurant, because McDonald's spends a great deal of time and effort ensuring this consistency. With Joe's Burgers, the minute Joe walks out the door, half his customers might follow him — and who is going to help in the transition process? Who will ensure quality control?

Most people would certainly prefer to buy the McDonald's, and thus its owner could command a higher selling price.

At the same time, ask yourself: Which of these units has the greatest potential? Joe's Burgers does, of course. Because you could turn Joe's Burgers into a chain—perhaps even a franchise chain — yourself, thus reaping far greater rewards.

While the brand is part of it, your real value proposition lies in the quality of the system and the amount of support provided by the franchisor.

Ultimately, the secret to the success of most franchisors is that they make a lot of money for their franchisees. Franchisors whose franchisees become millionaires have no problems finding more franchisees.

Get started with The Franchisee Handbook

In The Franchisee Handbook, franchise expert Mark Siebert walks you through the process of vetting and buying a franchise, helps you ask the right questions of franchisors and yourself, and gives you the resources you need to decide if franchising is right for you. Siebert shows you how to do your homework before making what could be the greatest financial decision of your life. You will learn how to:

  • Accurately assess the risks of buying a franchise
  • Determine if a franchise is a good fit for your personal goals
  • Research and vet potential franchise opportunities
  • Create a startup plan that meets your business goals
  • Prepare your franchise for success

Why dream about owning a franchise when you can take concrete steps to make it happen today? With The Franchisee Handbook as your guide, you have the power in your hands to start your own franchise journey right now.

Entrepreneur Staff

Entrepreneur Staff


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