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Franchise Advice

What to Know About Franchises

Have a firm grasp of why businesses franchise. The most important one, of course, is money. Franchisers make their money on selling their deals to franchisees; the set up of the business (development); ongoing inventory purchases; and through ongoing financial support in the form of a monthly payment of either a percentage of the business or a set dollar amount.

The most predominant in the USA is a percentage. In short, if you buy a Little Sally Ethiopian Deli franchise, every thing you use in your business with the logo on it (which generally only excepts the trash can liners), you must buy from the franchiser. That’s why McDonald's is so successful. Think about all those potatoes and hamburgers, napkins, cups, etc., all purchased by franchisees from the franchiser. Thankfully, laws and regulations pertaining to supplies and inventory purchases prevent the franchiser from gouging their own franchisees.

Franchise Pluses

All of this can tend to benefit you. With franchises like McDonald's or Mail Boxes USA, and many others, you benefit from:

  • Past marketing efforts
  • Assistance in selecting a location, which often includes a geographical Territory that's yours alone
  • Assistance with obtaining the necessary permits, licenses, regulatory approvals, if any
  • In-house training of their systems to ensure during the process, you have the capability to be a profitable member of the team. (Remember, a part their profit comes from the fee you pay. They make it or break it in the long term with the percentages.)
Potential Pricing Pitfall

If possible, try to have some autonomy with pricing and participation in promotions. Have you ever noticed TV ads with the disclaimer "at participating locations"? There are numerous reasons why you wouldn’t want to "buy-in" to a promotion. Often, there are additional participation charges over and above the regular franchise fee. These can break the bank of a small franchisee.

For example, I have a Mail Box USA just three blocks from my office. Recently, I wanted to ship a FedEx package and went down there. When I discovered the cost was twice what it would cost me to drive to the FedEx terminal (20 miles away) and mail it, I left. I told the franchisee that his charges were double. His reaction was "Maybe that’s why our FedEx shipments have gone down considerably." Ya think? He didn’t know he was way overpriced.

So be cognizant of competitive costs. If your franchiser requires that you purchase your supply of dinner napkins at $24 each, when you can buy the exact same napkin elsewhere for $1 each, you need to know that. There are regulations and several states, which require registration of franchises before they can be sold in those states, just so these abuses won’t occur.

Final Franchise vs. Business Tidbit

Another way to look at franchising is that with your own business, you rely on yourself and your resources. With a franchise, you have to rely on the competency of the franchiser, first, and yourself second. Just like all restaurants, you can get the occasional bad meal.

Franchises are like cafés. Some are excellent, like the Idea Café (shameless plug). Some are good, and some you wouldn’t want to eat at no matter how many eighteen-wheelers there are parked out front. It’s incumbent on you to check out the validity of the franchise before you buy.

Hope this helps.

Kent Capener of Capener Consulting

Idea Cafe's Recommended Resources on Franchising & Starting a Business

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