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Tuesday, September 20, 2011

Top 6 Reasons That Franchises Suck!

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Top 6 Reasons That Franchises Suck!

A slightly provocative headline I know, but buyer beware, this is a business industry that claims as many losers as winners
Set Up Fees – Upfront
A Franchise fee can set you back between $200k – $6 million As an example McDonalds’ restaurant requires a MINIMUM down payment of $500k of non borrowed money – they also require the balance $1 million+ to be paid off within 7 years!
Many franchises require the franchise owner to work full-time in the business, they are not looking for absent investors so you cannot have other business interests, and you may need to commit yourselves to 20 years in the business. 
You have to consider whether the actual time commitment is worth it. Are you looking for an opportunity to leverage your time or are you buying a job? This time investment can be pretty unglamorous work including doing the accounts, setting up tables, and dealing with a myriad of day to day customer problems
Location absolutely matters and often circumstances beyond your control can change the value of your location or indeed the cost. For example shopping centres/malls can change their rules, or renovations can dramatically reduce the required traffic to your business
Even if you have the upfront franchise fee in cash, you will need to have a set amount of cash flow funds readily available to you, a net worth that meets your franchisor's minimum requirement, and working capital to support your ongoing expenses to the extent that they are not covered by your revenue. Depending on your business, you may need as much as two or three year’s worth of working capital.

You will incur initial and ongoing costs. Upfront, your costs may include thefranchise feean initial cash investment, professional fees e.g., legal services, insurance, employee training, operating licenses, inventory, equipment, and the numerous costs associated with a retail location such as rent, outfitting a store with fixtures, equipment and seating, d├ęcor, signage, and landscaping.

On an ongoing basis, your costs may include paying royalties to your franchisor — generally this is 4 to 6 percent of your revenue — advertising fees, equipment maintenance, employees, insurance, and inventory.

After all this effort and investment of time, money and emotion you have to consider the risk. Sure, nothing ventured nothing gained but the risks can be considerable. You may not be able to exit quickly if things start to unravel.

That said thousands of people will run hugely successful franchises but it is worth doing significant due diligence before you take the plunge

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