Franchise loans and their misconceptions

Franchising misconceptions can cause someone to jump into a business opportunity ill-prepared or ill-informed. The biggest make or break for first-time franchisees is preparation and planning; those are key to a successful franchise. Below are seven common misconceptions about franchise loans.

1. Success Is Guaranteed

The name and brand recognition of a franchise is one of the most important factors of success for a business but that does not mean success will be guaranteed. When operating or considering to operate a big name franchise such as McDonald’s, Taco Bell, or Subway, you inherit the brand’s reputation and credibility within the marketplace. This helps but ultimately, the franchise’s success is dependent on the franchise and their business’ operations, like any other business.

2. You Can’t Manage A Business You Have No Experience In

The great thing about a franchise opportunity is that you are given the roadmap a franchisor has already experienced success in from an operations, marketing, and even sales standpoint. A good franchisor can be an unparalleled supporting ally for a beginning entrepreneur. Franchisors also offer plenty of resources and assistance throughout the initial start-up period for the franchisee. Resources offered by franchisors can be anything from marketing materials, training programs, field support, to guidance. Some franchisors can also help franchisees on the backend by helping negotiate lease terms or finding and choosing a desirable location.

3. Franchising Is Too Expensive

The upside to franchising is that there is a suitable opportunity for every budget. Many franchises such as A&W Restaurants, Ace Hardware, and Baja Fresh Mexican Grill can be started for less than $500,000 while others, such as 7-Eleven, can be started for less than $10,000. There are one-time, upfront franchise fees and royalties but outside of that, the expenses associated with your startup do not differ from other businesses. However, it is important to investigate and understand the fee structure associated with your franchise. Then, not only can you ensure the fees are justified, but you can also ensure the prices of service or products do not hinder your ability to make a good and comfortable living. Ultimately, more math may be involved to forecast your profit but the additional costs come with benefits a typical startup does not have. Below is a rough example of 7-Eleven operating costs based on the average 48-52 split that favors 7-Eleven.

  • Store sales
  • Store GP% (the amount your store profits from sales, roughly 36%)
  • Payroll (guideline is 9% of sales)
  • Other expenses (guideline is 3%)

Based on these profit factors, a typical 7-Eleven store without gas makes the following:

$1,500,000 Store Sales x 36% Gross Profit x 49% split = $264,600 Gross Profit

$264,600 Gross Profit – $195,000 expenses = $69,600 income

4. There’s No Creativity In Franchising

As mentioned, franchises offer the foundation of your business but that does not take care of day to day details. As a franchise owner, you still have to build a team that is right for your business, target an audience within your territory, balance a budget, as well as keep customers happy, all of which require creativity and original thought.

5. Franchising Is Easier Than Starting A Business

In some areas, yes, franchising can be easier than starting your own business. Franchising, however, gives you the opportunity to bypass all startup activities such as development of products or services, price points, selecting vendors to work with, business planning, and sourcing investors. Franchising still requires all the necessary skills and responsibilities of a business built from the ground up.

6. The Franchise Can Function Without Owner Presence

Those interested in investing into a business model with the hope that it will produce a reliable income stream with little to no effort from the ownership end can expect their franchise not to reach its full potential. A MLM (multi-level marketing) company is a chopped down version of franchising that requires substantially less business skills. Successful franchise operations and management require presence and owner involvement.

7. Franchisors Don’t Care About Your Success

Probably the most common misconception of franchisee success means success for the franchisor. A franchisor cannot exist without franchisees. Although a franchisor does rely on the royalties paid by a franchisee, a franchisee also relies on the support and business foundation provided by the franchisor. Both sides of the business contribute to the success of all parties involved.