What do you think of when you hear the term franchise?
My best guess would be an image of a big golden arch pops into your mind. Perhaps the best known franchise (and most successful) in history, Mcdonalds.
Thanks to the success of Mcdonalds, the franchise model in fast food has absolutely exploded over the last several decades. The vast majority of fast food places you will encounter in the Western World operate under a franchise structure.
Besides the fast food industry, there are numerous other sectors in which franchises are significant players in the space. Mortage brokers, tax agents (H&R Block), hairdressers, motor vehicles (sales and repairs), supermarkets and smaller corner stores all have plenty of operators that work under the franchise structure.
What we’re going to focus on in this article however, is the services industry. In particular, services such as cleaning, gardening and other home services.
Who is the most recognised player in this space? You’d probably know the face.. It’s got to be Jim’s. There are plenty of others however. The 8th largest franchisor in the world is Jani-King, a commercial cleaning service. You may have also heard of VIP. There are a multitude of others around but we won’t go into too much depth.
So now we’ve got a bit of a look at franchises overall, the goal here, is to look at the franchise system and how it works, then provide a comparison to starting your own business. We’ll look at the pros and cons of each, providing you with as much useful info as possible along the way, to aid in making a decision.
So what exactly is a franchise?
So we already know what a franchise is… We’ve got the Mcdonalds, the Salon Expresses, the Jim’s Group. But what does the term mean exactly?
First, let’s define a few terms;
Franchisor: The owner of the brand, products and trademarks that are made available for use (at a cost) to the franchisee.
Franchisee: Pays for the use of the brand name, right to sell the products and use the systems of businesses owned and controlled by the Franchisor.
Royalty Payment: An ongoing fee paid by the franchisee, for the use of brand name, business process and ability to sell products belonging to the franchisor.
The International Franchise Association defines a franchise as ” a continuing relationship in which the franchisor provides a licensed privilege to do business, plus assistance in organising training, merchandising and management in return for a consideration from the franchisee”. That consideration is the upfront cost, royalty payments and purchasing specified in the franchise agreement.
So to give an example… In the case of Mcdonalds; Mcdonalds itself as an entity, is the franchisor. The franchisee, is the inidvidual who runs a particular store. He or she then pays Mcdonalds for the right to do so. An upfront fee will be paid for the setup of the store (in the case of Mcdonalds, this can be over $1 million). The Franchisee will then pay Mcdonalds an ongoing royalty fee each month, for the right to use the Mcdonalds brand name, use the systems that Mcdonalds has established, use of suppliers and deals that Mcdonalds has developed and get ongoing support in running the store. In addition the franchisee may be required to pay for marketing fees and make a certain purchase order of supplies each month.
What then, are the benefits of such an operation?
You’ll probably recognise many of these logos of franchises operating throughout Australia.
The Benefits of Buying a Franchise
There are several key benefits to buying a franchise…
1. Business Structure
Essentially, you are buying a proven business model that has demonstrated it’s performance across time. You know people buy Mcdonalds food. You know people use lawnmowing services like Jim’s Mowing provide because you see them out mowing lawns all the time. You are purchasing security in some sense.
This also means that the setup process is taken care of. No figuring out how to register the business, how to get a logo and website designed, how to put your business systems in place.. all this is done for you. That can be a huge help when starting out.
2. Guaranteed Work
As well as a proven business model, you are buying ‘work’. Franchises will generally provide a work guarantee that ensures you earn a certain amount each month. In the case of Jani King Cleaning franchises, they know they are getting a certain number of enquiries each month and so many convert into leads. They’ll pass these on to the franchisee. Once again, this provides security to the franchisee. One of the biggest unknowns and fear factors in starting a new business is not knowing where the work will come from. With a franchise, upto a certain point, that is taken care of.
3. Support
What if things go wrong? What if I need help addressing an issue in the business? With a franchise, you’ve got a support network to help remedy those concerns, something that just doesn’t exist as a lone operator.
4. The Brand
Finally, you’re buying the brand. Why do people buy Mcdonalds food? Because they know what it tastes like. They know what they’ll get without much chance of getting a suprise. Why do they use Rams mortgage lenders? Because they’ve seen their ads on t.v. They already have placed a sense of trust in the brand, beyond what they would have for an unrecognised brand named lender with a sign along the main road.
What do all these points have in common? Security. That’s right, if you’re in the market for buying a franchise, essentially you’re looking for surety, for peace of mind. Something that you know works and won’t provide too many unknown variables. If you’re risk averse but still want a taste of what it’s like to run your own business (though it’s really not your business), then a franchise might be a good way to go.
Downsides to Buying a Franchise
There are undoubtedly a range of benefits in buying a franchise. Most, as we’ve found, come from security. So what are the downsides..
Upfront Cost
First things first, we have the upfront cost. These can range anywhere from $20,000 for a cleaning business to $1 million + for a Mcdonalds, gym or finance franchise.
See the data below for figures in the U.S
They certainly don’t come cheap. While much of the cost will be paying for equipment, training, infrastructure and systems, you can be assured there will also be a portion going towards lining the franchisers pockets.
Ongoing Costs (Royalties + Other)
The other and often less thought of cost (though perhaps most significant) is the ongoing royalties a franchisee must pay. The royalty fee can be a set monthly figure (e.g $500 per month) or a percentage of revenue or profits. They can range from 1-20%.
For instance Jims Cleaning in Australia has a flat fee of $650 per month. Royalty fees for Jani King by comparison are 10% of gross revenue.
If you’re turning over $10,000 a month as an example, for a Jims franchise, you’d be paying $650. For Jani King, you’d be paying $1,000. Both of these costs are before any of your expenses are accounted for.
In addition, some franchises contain additional regular fees that are payable by the franchisee. These can include marketing fess and other ‘licensing’, accounting, legal and practically a myriad of others.
Many, particularly in the fast food industry, will ensure enforce that you buy supplies only from them, often at a markup from regular market rates.
Yes, the costs of buying a franchise do add up and quickly.
Lack of Flexibility
When running your own business, you generally want the ability to experiment, to try new marketing techniques, to provide a new product or service that you think will suit your target market. If you own a franchise, that’s generally not possible.
They’ll ensure you only provide what they agree to, with heavy penalties associated with stepping outside the boundaries. Same goes for marketing- you must stay on message and not get carried away with new marketing methods or sales lines. Much of this is understandable- the point of establishing a brand is to be consistent across locations, so people know what they’re going to get. If 1 franchisee decides they want to start offering beer at a Subway store, they’re going to potentially ruin the credibility of all other franchisees across a large radius.
Still, it certainly limits what you can do within your operation.
Lack of Upside
The idea of most franchises is to sell as many as possible and to have as many operators as possible across a certain geographic location. As such, most franchisees are divided into ‘territories’, ensuring each franchisee can only sell to a particular market, without encroaching on others territory. This can be very damaging to upside profits and there will be a ceiling on what you can earn.
Lack of Ownership
In the most cynical outlook, it can be argued a franchisee is essentially buying a glorified job. They are paying for work, for the opportunity to be part of a larger company structure and paying a percentage of their earnings to the company each month.
There is the lack of any real sense of ownership and freedom that comes with owning your own business when operating under a franchise model. For many, the freedom to control their own operation and their own future is the reason they got into business in the first place.
The franchise costs of owning an F45 franchise.
Conclusion
While the idea of the article was to remain as unbiased as possible, we would highly recommend to stay away from buying a franchise unless there is an opportunity to get a great deal and you are happy to forego freedom and upside for low risk. Please, if nothing else, make sure to go over the terms and conditions with a fine tooth comb before committing to anything. If there’s a clause that sounds detrimental to you as the franchisee, chances are it is. Proceed with caution.
What Are the Alternatives to Buying a Franchise?
Well, essentially there are 2;
- Starting your own business
- Buying an existing business.
We offer a hybrid between the 2, a completely customised business setup at low cost with all the perks of running your own business (because it is), without as much of the risk.
We’ll do up articles on each of the other options in the near future as well.
