If you are considering buying or selling a business, SCORE just completed five videos in a four part series addressing exit strategies and purchasing a new business. You can view all SCORE Business TV episodes, including the ones on how to buy or sell a business on the SCORE Manasota website. With this video, we're beginning a new series about Buying a Franchise.
Benefits of Franchising
Today, we're addressing the benefits about how to buy a franchise business. We'll be exploring what a franchise is, what types of franchises are available, how to choose the best one to fit your needs, and the cost of buying into a franchise and operating a franchise. SCORE is a 55-year-old nationwide non-profit organization providing free mentoring services to business owners. Our SCORE experts are here to guide you safely through that minefield.
Buying a Franchise, What You Will Learn
In this video, host Dennis Zink and his two expert guests, Jenny Sutter and Bob Melberth, discuss the following topics:
What a franchise is
The difference between a licensing agreement and a franchise agreement
The percent of franchises in business after 10 years
Why franchise systems work well for restaurants
How many different industries franchise
How to choose the best opportunities
How much it costs to get into a franchise
When is the best time to acquire additional units
Understanding the first right of refusal
Is there a difference in building equity in franchise units versus non franchise
Franchise profit margins
The cost structure in buying and operating a franchise
Understanding how royalties work
Understanding advertising fees
The franchise operating license term
Understanding renewal fees
Why it’s easier to finance a franchise business
What the ROBS program is
How FranNet can help with financing through FranFund
What the SBA franchise registry list is
What the Franchise Disclosure Document is
FTC required franchise documentation
Why veterans make good franchise owner/operators
Who makes good franchise owners
Why franchises fail
How franchisor and franchisee support is helpful to success
How to expand a business and consider becoming the franchisor
What Fees are Involved When You Buy a Franchise?
“Going into buying a franchise, you have to pay that upfront franchise fee, and then beyond that, you're going to pay ongoing royalties. Those can be structured in various ways, whether it's a monthly percentage of gross sales, whether it's a flat fee on a monthly basis. When they start, is it two years in? Is it immediately? Those are royalties that you do have to pay. Also, not all franchises, but quite a few of them make you pay into what's called an ad fund or an advertising fee, so that also would be a percentage of gross sales generally or a flat fee on a monthly basis. There's even some that will charge a technical fee, so depending on what kind of technical aspects there are to the business,” said Jenny Sutter.
“The average royalty is about 6.75, so between 6% and 7.5% is the average. Now, they go higher depending on the kind of service or the kind of franchise that you're buying into, but then it does again vary from an advertising standpoint. Whether it's 1%, 2%, or a flat fee, so it really does vary franchise-by-franchise basis based on what they're providing you in return,” Sutter added.
What Profit Margins Can a Franchise Make?
“The only thing I'd add to what Jenny just said would be, if indeed you operate to the end of your term, because every franchise has an operating license term, five years, 10 years, McDonald's was 20 years, you can renew that license if you've operated properly and the franchisor wants to renew with you. Many times they do have a renewal fee that would be at the end of your timeframe for your operating license,” said Bob Melberth.
“If you've got to make an investment in real estate, physical facility, equipment, etc, then I believe that the profit margins may be a little lower in that type of business. If you're offering a service and you are perhaps using your talents and skills and that's really the only cost you have, one of my businesses was as a consultant and so I didn't have a whole lot of costs built in. That one may have a better profit margin, but you're also limited to your 168 hours a week that you have to deliver the product,” added Melberth.
Dennis Zink, SCORE Manasota Chapter Chair
Jenny Sutter, Franchise Consultant and owner of FranNet
Bob Melberth, Volunteer SCORE Subject Matter Expert
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