Should You Start a Business or Buy a Franchise?
Should you start a business or buy a franchise?
I created Fit Biz In a Box for the entrepreneur who wants to truly be the owner and make their own decisions. However this may not be for everyone. I’ve written this article to help you decide what is best for you.
Let’s begin with defining a franchise:
A franchise is a legal and commercial relationship between the owner of a company (the franchisor) and an individual (the franchisee) who is starting a branch of that business using the business’ trademark logos and business model. The franchisee sells the service or product that the franchisor supplies.
Pros of a Franchise
- Experience – no experience needed. You can buy a franchise without having any previous work experience in that industry
- Eliminating the Start Up Stage – you won’t need to write a business plan, define your product or service, test it, or scale it
- Instant Name Recognition – your franchised brand will likely be known so you won’t need to build it; this can also help grow your customer base quicker and attract employees easier
- Training – you will be trained on negotiating for the location and overseeing construction if needed, or negotiating a lease, how to open your business, operate it, and staff it
- Software –gym management software and point of sale hardware is included, as is training on both
- Marketing – you will receive some nationwide campaigns as part of your franchise investment, as well as help on how to develop localized campaigns
- Purchasing Power – you will have access to suppliers and materials probably at a reduced cost
- Financing – banks are more likely to loan money to a franchisee than to a new small business owner; you may have the opportunity to be financed through one of the franchisor’s partners
Cons of a Franchise
- Liquid Capital – proof of a minimum amount of liquid capital is required, likely between $125,000 and $300,000. It is the value of your cash, stocks, bonds, and any additional cash like securities you could readily invest or use as backing to acquire financing. This ensures the franchisors that you can acquire necessary financing, even if it is through one of their partners
- Net Worth – proof of your minimum net worth is also required. It is the difference between assets and liabilities, and can be $500,000 or more
- Start Up Costs –franchise fees for gyms can range from $30,000 to $300,000, and your overall upfront investment can easily approach be $500,000 to $1.2 million
- Financing –is not always guaranteed, and if financing is available, you may not be comfortable with terms
- Royalty Fees – these recurring fees are for continued use of the brand name and their support and systems. They can be a set percentage like 5% or 10% of your monthly gross revenue with a minimum amount that is required even if you aren’t profitable that month, or can be a flat rate such as $499 per month
- Marketing – you will have to pay a portion of your monthly revenue for the nationwide marketing such as 2%
- Control – you have no control over your brand, policies, systems operations, staffing, and the like; and little control over your own operating policies. If you have an idea on how to improve one of their policies or procedures, you may not be permitted to follow it, and you don’t have any recourse
- Location – you are often told where you can open a franchise based on the location of other franchisees and also where the franchisor wants to strategically position you
- Restrictions – in addition to where you are located, often times you are told which products you can sell and the suppliers you can use
- Reputation Management Issues – should another franchisee receive bad press, it will reflect on you because you are the same brand
- Dependence – if the franchisor undergoes a major financial strain, closes, or is facing allegations of a scandal, it could seriously impact your business or force you to close, even if you are profitable and/or not involved in the scandal
- Contractual Agreements – you will likely sign a Franchise Disclosure Agreement which binds you to its terms, basically what you can and cannot do, with repercussions up to and including losing your franchise if you break one of those terms
- Franchise contracts – are not permanent. At the end of the initial Agreement, the franchisor has the option to not renew it even if you want to continue being a franchisee
- Commercial Lease – even if you stop being a franchisee, you will still be financially responsible until the end date of your lease
- Financial Information – must be shared with your franchisors
- Growth Restrictions – if your gym is wildly successful, you will not be permitted to expand it by opening other branches and starting your own franchises