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Should I Start A Franchised Business?

January 2017 Newsletter Article A component of achieving success in business is having the knowledge as a business owner of all of the laws that apply to your enterprise and assuring compliance with them. Another component of achieving success in business is to acquire the knowledge of all the costs and risks that apply to your particular business enterprise before you begin, which includes the consideration of alternatives to a business plan. In starting a business, it's always tempting to start from scratch with an original, personal business idea, but there are other alternatives such as purchasing a pre-existing business or starting a franchised business. Today, I'll discuss the latter option for business owners. Franchised businesses are charters or authorizations from companies to carry on specific commercial operations using the franchisor's products, services, brand names, and trademarks. They range from McDonald's to Maaco to the UPS Store. Like most anything, there are good reasons to buy a franchise-and bad reasons. As a new business owner, should you start a franchised business? A business franchise is significantly valuable because it has products and services that are pre-established in the marketplace. At least, this is the hope and one of the main purposes of starting a franchise. Some franchises are more well-known than others, which is naturally going to primarily determine the existence of any pre-established customer base. Thus, a great commitment to the franchise's business model is essential for a franchisee to fully take advantage of the franchise's prior success and capitalize on what is typically a substantial financial investment of the investor's life savings. While a franchise allows a business owner to start with the advantage of an already-tested business model, it also allows a franchisee to maintain fairly substantial autonomy over the business, including the hiring and firing of employees. The franchisor still maintains quite a bit of power, but having the authority to make major upheavals to any franchise business, such as change the color of the UPS trademarks to blue, wouldn't be a smart business decision on the part of a budding, new franchisee anyway. Another advantage of a franchise is the ability to access the experience of the franchisor and its established franchisees for guidance and support in operating the new franchisee. Franchisors are also patient with new operators and don't expect them to immediately possess the ability to efficiently run a franchise. Thus, there's a reasonable learning curve which relieves some, albeit perhaps minimal, pressure to achieve early success with the business. Franchisees are also able to avail themselves of the franchisor's buying power which can help negotiate lower prices for products and services necessary to operate the business. On the negative side, operating a franchised business also requires a commitment to a seemingly endless demand for time, energy, and, of course, financial resources. Franchise owners are ultimately responsible to customers, employees, but also the corporate headquarters of the franchise. Days are never seemingly long enough for the owners of some franchises. Of even more importance is the fact that franchises are expensive and typically six-figure investments in startup costs, such as the payment for commercial property leasing, inventory, and equipment, in addition to the base franchise fee. To open a McDonald's franchise reportedly requires a minimum total investment of $1 million, but since it also requires available liquid capital of $750,000, it's more accurate to realistically call it a minimum investment of $2 million. The base franchise fee itself is $45,000, which is higher than most. And let's not forget that although the risk is reduced for a franchised business, there still remains a risk, which may be minimized by the assistance of competent and experienced legal counsel. It is important to enlist the assistance of an experienced business attorney to ensure that as the entrepreneur of a new business, you correctly and informedly make the choices that further your goals in starting a new business. To this end, starting a franchised business may be a viable alternative. At R. D. Adair, PLLC, we can assist with this and all other considerations in forming a new business.


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