If you’re curious about opening a franchise, this quick read covers all the bases including initial investment, profit potential, ongoing costs, franchisee requirements, and the best and worst franchises to own.

First off, who is doing whom a favor? Are franchisors (the companies) in desperate need of franchisees (you), or is it the other way around? It’s the other way around. Chick-fil-A gets 20,000 applications each year and approves only 75. That’s less than 1 percent. 

Franchisee Requirements

Don’t have much money? Have a bankruptcy or a criminal record? Forget about it. Franchisors set the bar very high. In order to be considered as a McDonald’s franchisee, you must have a minimum of $500,000 in liquid assets – cash or stocks that you can lay your hands on overnight. McDonald’s requires a minimum down payment equal to 25 percent of the total investment plus you must pay off the balance in seven years. Chick-fil-A limits you to one restaurant and you cannot have any other business ventures.

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Most franchisors require several weeks of training. The good news is, the cost is typically covered in the franchise fee. Here is a list of franchise fees and initial investments:

• McDonald’s: $45,000 franchise fee, $1,500,000 initial investment.
• Sonic Drive-In: $45,000 franchise fee, $2,000,000 initial investment.
• Taco Bell: $35,000 franchise fee, $1,500,000 initial investment.
• Tuffy Auto: $30,000 franchise fee, $300,000 initial investment.
• UPS Store: $30,000 franchise fee, $300,000 initial investment.
• Great Clips: $20,000 franchise fee, $200,000 initial investment.
• RE/MAX: $25,000 franchise fee, $125,000 initial investment.

Profit Potential

The average franchise owner earns an annual income of $120,000. The bottom third make only $50,000 and the top 15% earn $200,000. It’s a living, but you’re not going to get rich owning a franchise. Not unless you’re willing to own several of them. The costs and headaches associated with owning a business compound with each one that you own. When you take into account the upfront costs and other requirements, it’s not for everyone. Another thing to consider is the fact that you are not the one calling the shots, the franchisor is. As a franchisee, you are part business owner and part employee. Not technically, but practically. 

Ongoing Costs

In addition to the upfront costs, franchisees must pay royalty fees in perpetuity. McDonald’s requires a royalty equal to 4 percent of monthly sales. Marco’s Pizza charges a royalty of 6 percent of monthly sales. Royalty fees range from 3 to 10 percent and average around 6 percent.

Best and Worst Franchises

Simply put, the best franchise to own is one that you have heard of, and the worst is anything you haven’t. When you buy a franchise, you are buying a name. To a lesser extent you’re also buying an established business model. Any company that you have never heard of is a bad investment because you’re paying fees and royalties and getting little in return. It’s all about brand recognition. If you can only afford to buy an obscure brand, you might be better off starting your own independent business. 

So why do people do it? Why do they invest their hard-earned dollars in a franchise no one has ever heard of? People get it in their heads that they are going to own a franchise, and when they discover they can't afford to run with the big dogs they settle for what they can afford. Here are a few low-cost franchises:

• Cruise Planners: $10,000 franchise fee, $10,000 initial investment.
• Dream Vacations: $5,000 franchise fee, $12,000 initial investment.
• Jan-Pro: $20,000 franchise fee, $25,000 initial investment.

According to the Small Business Administration, 92 percent of Noble Roman Pizza franchise owners default on their loans in the first 10 years. Here is a list of franchise 10-year loan default rates:

• Noble Roman Pizza: 92%
• Image Sun: 80% 
• Wireless Toyz: 74% 
• Country Clutter: 71% 
• Camille’s Sidewalk Café: 70% 
• Planet Beach: 68% 

Conclusion

Owning a popular franchise can give you a leg up in the business world. Based on brand recognition, customers flock to your doors the moment you open. On the other hand, owning a lesser-known franchise can lead to financial ruin – the loss of tens of thousands of dollars, damaged credit, and years of hard work down the drain. When it comes to owning a franchise, it pays to choose wisely.

Photo credit: Pixabay Eggstack News will never post an article influenced by an outside company or advertiser. Our mission is to help you overcome uncertainty about retirement planning and inspire confidence in your financial future.