Money Power: Do your homework before investing in a franchise
BY SANDRA BLOCK Money Power
Sunday, March 10, 2013
3/10/13 at 5:05 AM
For wannabe entrepreneurs, franchises offer a proven business model.
"You can get into business really fast," says Joel Libava, a franchise consultant and author of "Become a Franchise Owner!" "In a good system, mistakes have been made, kinks have been ironed out."
A typical franchise agreement gives you the right to use a franchise's name and business system for a specified period of time, which can run anywhere from five to 20 years. You may receive training, help in finding a location, management advice and ongoing support. Many franchisors also provide national advertising and marketing.
Buying an established business model doesn't come cheap. Startup costs, which include the franchise fee, inventory, insurance and equipment, range from less than $25,000 to more than $1 million.
In addition, Libava says, most franchisors require franchisees to have a net worth of at least $350,000, of which $50,000 to $60,000 must be in cash. Some well-known companies have much higher thresholds. In addition, you'll probably have to fork over a percentage of your monthly gross revenue. The average royalty fee is 6.7 percent, according to Franchise Direct, an online directory of franchises for sale.
The bottom line is you assume most of the losses if the business flops, but you'll be required to share the rewards if it succeeds.
A franchise broker can help you identify a franchise that fits your finances and interests. Begin your search at tulsaworld.com/franchoice, or try tulsaworld.com/franpoint, which specializes in restaurant franchises.
Before you invest any money, conduct your own financial analysis, says Bob Papes, a small-business consultant in Henderson, N.C. Far too often, says Papes, franchise owners fail to estimate how much money they'll need to earn to cover their initial investment in franchise fees, materials, overhead, salaries and other costs.
Only about half of small businesses, including franchises, survive the first five years, according to the Small Business Administration.
Original Print Headline: Franchisers need to do their homework
Sandra Block is a senior associate editor at Kiplinger's Personal Finance magazine. To send her a question or comment, go to tulsaworld.com/kiplingerfeedback.
