Sometimes you get fed up with working for someone else and just want to venture out on your own. But becoming an entrepreneur and thinking of a new idea from scratch can be expensive and time-consuming. Instead, one of the best ways to become your own boss while not having to reinvent the wheel is by buying a franchise.
Franchising has been around for decades, and has served as one of the best ways for individuals to control their own destiny and buy their own business. Buying a franchise doesn’t come without its own concerns, but many people have found owning a franchise to be the best decision they have ever made.
A franchise is an agreement between a business and individual (or group) which allows them to carry out certain commercial activities. This allows the business to more widely distribute their products or services, while the individual can profit from the business model and branding of the corporation.
There are two parties involved in franchising, the franchisor and franchisee. According to the International Franchise Association, “the franchisor establishes the brand’s trademark or trade name and a business system; and the franchisee pays a royalty and often an initial fee for the right to do business under the franchisor’s name and system.
Because the franchisee operates a business under the franchisor’s name, they often must follow strict rules and regulations. This may not bode well for people who are very independent and like to innovate on their own, but works perfectly for those who are good at following directions and being regimented, like military veterans.
It is widely agreed upon that the beginnings of franchising dates all the way back to the Middle Ages. During these times, church representatives were given the right to maintain order and assess taxes on the public by the local government. Others were given the right to operate other business activities like operating a ferry or creating a market. In exchange, the government took a portion of the money that came in from these activities.
This idea evolved quickly during the 1800s and 1900s, as local bar and pub owners became the exclusive distributors of beer, yet the breweries themselves did not operate the daily business of the pubs. Other franchises began to pop-up during this period, including some fairly well-known companies like Singer sewing machines.
Today, franchises are common across a variety of industries, including food services and hospitality. Franchisees find significant value in leveraging the name brand recognition of a franchise to be their own boss. A franchise gives business owners a template to success. In this way, franchising is the best of both worlds: financial independence without having to start a business completely from scratch.
Some of the largest companies on the planet today operate in a franchise model. These companies have created significant opportunity for people to own their own business while leveraging the brand name and structure of already successful businesses.
When Ray Kroc started McDonald’s, it was a simple burger joint churning out hamburgers, fries, and milkshakes at lightning speed. Kroc went on to perfect the efficiency of his fast food establishment, which led him to opening more and more locations across the country.
Today, McDonald’s is one of the most recognizable brands around the globe, making it a great franchise candidate for those interested. But it won’t come cheap. According to McDonald’s 2017 franchise disclosure documents, it could cost up to $2.2 million to purchase a McDonald’s franchise, with a minimum of $750,000 in liquid assets needed to conduct the transaction. It isn’t just money you need either, as the company requires its franchisees to have strong business skills which are necessary when managing up to 125 employees per franchise.
The ongoing service fee of 4% of gross sales and 4% for advertising and promotion are steep. But it’s a small price to pay for access to a business which has global brand recognition.
Generally, a franchise comes out with about $150,000 in net profit each year. With extremely high startup costs, it may take a while to get into the green, but franchisees who have persistence will likely make out handsomely in the end.
Colonel Sanders didn’t find his success until he was in his 60s. Luckily, you don’t have to wait that long to franchise a KFC business to build your own financial success.
The Colonel began serving chicken in the 1940s and was rejected over 1,000 times in his first attempt to franchise his first restaurant. Even though Sanders sold the business, his legacy of perseverance and persistence lives on in KFC franchises around the world.
For those willing to dive into the world of fried chicken, there is significant wealth to be gained. The profit potential of a KFC franchise is significant. It is estimated the average franchise brings in $1 million per year in sales. Franchisees will have to pay a royalty of 5% of gross revenue, and a similar 5% advertising fee, but when all is said and done, a typical franchise can profit $100,000 a year for its owner.
To become a franchisee, KFC has a variety of financial and personal requirements for business owners. Franchisees must have $1,500,000 Total Net Worth and $750,000 Total Liquid Assets to their name. Additionally, they must retain a credit score above 700 along with business referrals and a positive reputation. Unfortunately, those with criminal convictions, previous bankruptcy, or a history of litigation won’t be considered.
Hilton Hotels & Resorts
It isn’t just food businesses that provide good outlets for franchising. Hilton Hotels & Resorts is another business with global recognition that operates franchises in hundreds of countries around the world.
Conrad Hilton built his hotel empire out of one Texas hotel to over 3,600 locations across the globe. Hilton purchased the Mobley Hotel in Cisco, Texas in 1919 and slowly began to purchase more and more hotel properties over time. By 1949, Hilton bought the famous Waldorf Astoria hotel in New York City, the first in a long line of purchases over the coming decades. Hilton Hotel is now a widely recognized and trusted brand of hotels which is popular among tourists and business-people alike.
Hilton franchises a significant portion of their hotels and works to build its brand to support these franchises.
Compared to other franchises like McDonald’s and KFC, opening a Hilton franchise will take significantly more cash. The total investment, in the end, can range anywhere between $30 million and $130 million. There are also a variety of fees for operating a Hilton hotel, ranging from a 5% royalty fee on room bookings, 2% fee on spa revenue, 3% royalty fee on food and beverage revenue, and more. Although, this is a small price to pay to get in on the over $10 billion in revenue generated per year at Hilton Hotels.
Is a franchise right for you?
Owning a franchise, especially a well-known franchise, can be very lucrative. By leveraging an already existing brand and business model, you can work hard to achieve financial independence. However, this doesn’t mean that you should go out and buy a franchise tomorrow. This is a decision which requires significant thought and preparation in order to make the right choice. You should always review the terms of a franchising agreement, as this will dictate how much money you can really make from a franchise. Do your own research on what makes for good deal terms, and include a lawyer in the conversation, as they will have more background and expertise into this type of legal agreement.
Alternatively, those who already have a successful business would be wise to look at the franchising model for themselves. This is how businesses have grown in global brand recognition while outsourcing the majority of the work to independent business owners.
Franchising has grown in significance over time precisely because it provides value for both the franchisor and franchisee. This win-win relationship has helped to build billion-dollar businesses from the ground up, while serving the independent business owner at the same time.