Monday, February 28, 2005

Do Franchise Royalties Hurt the Franchisee?

Many first time entrepreneurs feel that the added expense of franchise royalties will cut into their profits and make the business less attractive than if they were independent. The attached chart shows the impact a good franchise has on sales and profits.

Grand Opening Sales (and resulting profits) are usually higher for a franchise unit than an independent. After that, sales grow more rapidly thanks to a proven marketing plan, advertising programs that work, and help in choosing the right site for the venture. The franchise's training keeps the neophyte from going down many "dark alleys" that consume cash, time and energy. In addition, you gain name recognition and discounts on equipment, inventory and supplies---all adding to your bottom line. Over time, the independent business never catches up! If you don't have at least five years' experience managing a business similar to your new venture, a quality franchisor will be worth its weight in gold!

It's important that a buyer remembers his goal–-income drawn out of the business for personal and family needs. "What's in it for me?" should be the question. If sales of a franchise unit exceed a comparable independent by 35% to 50% (a very common scenario), if costs are 5% to 10% lower due to group purchasing power, then your profits should far exceed your competitor's. Don't be concerned about paying royalties. Determine that the operation's profits to you, the owner, will exceed what you could achieve as an independent, by more than the amount of the royalties. Remember, too, that when you decide to sell, you can expect to sell your unit more quickly and for a higher price than if you were offering to sell an independent business.

More proof that franchising is the best model for most entrepreneurs.

For more ideas on franchising, visit The Franchise Doctor's Website.