Franchising has been called one of the best business models ever invented and has allowed millions of Canadians to be their own boss. This month, we’re taking a closer look at what it takes to be a successful franchise owner so if you’re considering joining the ranks of the franchisee, be sure to follow our blog this month. This week, we’re looking at what you need to know before starting a franchise.
#1. Franchisees Are Investors
Many people don’t realize that franchising is really investing in a business in order to help it grow. Like any investment, then, it’s important to do proper cost benefit analysis and understand your exposure to risk, before you lay down your hard-earned cash. And, like any investment opportunity, you will be judged worthy by financial benchmarks, like a minimum net worth requirement. So before you consider looking jumping into the franchise game, be sure you start as you would with any other investment.
#2. Start Up Costs Are More Than You Think
While every franchise owner agreement is different, chances are the startup costs you’ll need to absorb are more than you realize. While you’ll likely get startup support like finding the right location and training, you’ll need to be prepared to incur the costs. Opening a McDonald’s, for example, can range from USD $500,000 – USD $1,000,000. These startup costs also don’t take into account the franchise fee that is automatically charged to every sale, regardless of how successful you are.
#3. There Are A Variety of Financing Options
Every franchise situation is different and as such, there are a variety of ways to fund your hefty startup costs. In addition to financing your new franchise yourself, you can take out a small business loan. Commercial banks prefer franchises with a long history and multiple locations and will assess your credit history, collateral and business plan in addition to requiring you to put down as much as 20% of the loan in cash. If you expect revenue of $5 million or less, consider the Canadian Small Business Financing Program (CSBFP) to finance up to 90% of your loan.
#4. Franchisors Require Uniformity
Franchising is all about creating a consistent experience, so they require their stores to have the exact same look, feel and experience. From processes to the lights you put into your parking lot, owners, have very little say in how to operate their business. But they do have direct control over the results, so their focus should be on executing, rather than innovating.
#5. You Buy Raw Materials Directly From The Company
In order to ensure consistency, many franchisors require their franchisees to purchase their raw materials directly from the company. Makes sense, right? But this requirement reduces the amount of control you have over your costs, and therefore your ability to turn a profit. It can also mean you’re required to pay more for these raw goods than you would otherwise.