Many people think that buying a franchise is a sure way to become a millionaire, but in reality, there are a number of reasons why becoming a franchisee isn’t all it’s cracked up to be. In this article, we’ll take a look at some important considerations before you dive head-first into a franchise purchase.
Pesky Start-Up Costs and Royalty Fees
Start-up costs and royalty fees can put a serious damper on a franchisee’s take-home pay. For example, when opening a McDonald’s, the franchisee must not only pay money toward the location, he or she must also pony up a $45,000 franchise fee for the right to operate the business for a period of 20 years. After 20 years, assuming the company agrees to renew the contract, another $45,000 franchise fee is charged.
The total monetary layout to open a McDonald’s franchise can range anywhere from $500,000 to $1.6 million.
The real kicker, however, is the ongoing royalty fee. Here’s how it works: Each and every year, franchisees must pay the franchise a fee equivalent to 12.5% of sales. It also means that no matter how successful you are as a business owner and how innovative you are at driving revenue, you’ll always have two partners: Uncle Sam and company headquarters.
The unfortunate part is that royalty fees are pretty standard in the franchise world. In fact, Burger King charges its franchisees 4.5% of sales in addition to a $50,000 franchise fee, and Dunkin’ Donuts has its franchisees cough up 5.9% of sales each year in addition to a franchise fee that can range anywhere from $40,000 to $80,000, depending upon the location.
Subtract payroll, food costs and taxes – in addition to these royalties – and it’s easy to see why life as a franchisee may not be the life of luxury you imagined.
Lofty Raw Material Costs
In order to maintain consistency among their offerings, most franchises insist that their franchisees buy raw materials directly from them or from a supplier with which they have a “special” relationship, meaning that they receive rebates on what the franchisees order. In any case, the prices that they charge for these materials (either the company or the supplier) are often much higher than what the materials would be sold for elsewhere.
In fact, it’s not uncommon for some fast-food franchisees to pay 5-10% above prevailing market value for a box of lettuce or tomatoes, or other produce that could easily be bought elsewhere. After all, produce is produce, right? It’s fairly consistent from vendor to vendor. The point is that over a year’s time, the premium that a franchisee may have to pay for raw materials can equate to big bucks!
Furthermore, if the franchisee does decide to go elsewhere for its raw materials and it violate the initial contract, the franchise has the legal right to terminate the relationship and, theoretically, the franchisee could lose his or her entire investment.
Lack of Financing
Most franchises don’t provide financing. This means that the franchisee will probably have to tap his or her savings or obtain some other source of financing (such as a small business loan). In other words, the franchisee is on his or her own!
With that in mind, some franchises, such as Lawn Doctor (which offers lawn and turf treatment services), will finance franchise fees, start-up costs, inventories and equipment to help their franchisees get started. Situations like these are particularly attractive because although franchisees will probably have to put up a portion of their personal assets as collateral for the loan, at least they won’t have to zero out their bank accounts or tap retirement funds to set up shop.
Lack of Territory Control
While most franchises will limit the number of stores that they open in a given area because of fears of market saturation and diminishing returns, many franchises will still try to fit as many retail locations into a given area as possible.
That’s why it’s not uncommon to see five different McDonald’s locations within a five- mile area – the corporate head is trying to squeeze every last dollar out of the territory. But the individual franchisee is really the one who suffers. Every time a new location opens within close proximity, their potential market is essentially cut in half!
Lack of Individual Creativity
Franchises demand uniformity. In fact, everything from in-store décor, signage, products offered and the uniforms the employees wear is dictated by the franchise. For a person who likes to be creative this can mean a bleak existence.
Unfortunately almost every (if not all) franchise has similar requirements. So, if you like to be your own boss, a franchise is probably not for you.
Franchise May Not Know Your Area
You’ve probably heard many times that “location, location, location” is the most important factor in determining the success or failure of any business.
The point is that unless the franchise sets up shop in a favorable location that’s going to support the business, the franchisee will have an incredibly difficult time making ends meet.
Take the Pizza Hut that’s located about five miles from my home as an example. Now I’m sure that the folks who compiled the demographics on the area and secured the location for the franchisee thought it would work out fine. After all, the town is chock full of people and in close proximity to a major highway.
But what headquarters probably failed to uncover was that the location is also virtually surrounded by adult communities. In other words, people who usually aren’t too keen on eating pizza or dining out with any frequency. In addition, a few miles up the road where the younger (pizza eating) crowd is located, there are four or five mom-and-poppizzerias that provide stiff competition.
Therefore, although franchises may be able to do a quick demographic study and gauge whether there is a good chance that a location will fare well, they rarely know an area as well as the locals.
Running a franchise is a serious decision that should be made with care. If you’re looking to buy a franchise, learn as much as you can about the company, its products and the city or town where you are looking to set up shop. Even a great product and a great location won’t guarantee a healthy bottom line, so make sure that you are aware of all the pitfalls of being a franchisee before you sign up for the job.
Above article is written By Glenn Curtis
at : http://www.investopedia.com/articles/pf/07/franchises.asp
What It’s Really Like to Own a McDonald’s Franchise
Reddit user McSoldIt is business man from New Zealand who has owned a total of three McDonald’sfranchises. He’s in the process of selling his last of the three, so took some time out of his busy day toanswer a bunch of questions from random Reddit users.
McDonald’s, if you’ve been living under a rock, is the world’s largest chain of hamburger fast food restaurants, with about 68 million customers daily in 119 countries across 35,000 restaurants.
Where did you get the experience to start your first one?
From about the age of 19 I worked at McDonald’s, worked my way up from the bottom, and eventually became a Shift Manager. I went to College and got a Business Degree, got a loan, and built a McDonald’s! They say that McDonald’s employees always notice the best places for new McDonald’s, they aren’t kidding. This helped choose the position for my first store.
What about someone who has the funds but has zero experience running a food restaurant?
Approach your corporate office. You don’t necessarily need the hands-on experience in regards to service, but you will need some experience in running a business, so a degree would help in that department.
Hi. About the loan – how much did you have to put in and what was your credit situation then for you to get approved for a $650k biz loan? basically, how does one get $650k to start a mcD? thanks.
The bank saw me as a viable ‘investment’, and they saw that McDonald’s loans pay off very quickly, and the chances are, if I got a loan with them, I’d bank with them too. So that’s my thinking behind it.
What was your worst customer experience?
People swearing at me when they realize who I am. I’ve been blamed for the hospitalization of an individual due to obesity. Wasn’t my fault – they just didn’t balance their diet.
Do you have any regrets?
In hindsight, yes. Having the food court store really damaged the company financially, especially after it closed – barely broke even on my initial investment, which was heart breaking.
How many complimentary ketchup packets could i take before i could get kicked out?
All of them. Just ask for the box.
Would you ever have given me the Big Mac sauce? Because no-one ever lets me have it on my fries.
Yeah, of course! We can do that by squirting some into a sundae lid, and charging you for one sachet of Mayo, which is 40c. Suggest this to the server next time you’re there, they’re still making money off of it!
Do you eat the food? Be it occasionally or regularly? Thanks.
Very occasionally. I don’t know why, but I’m not actually too fond of McDonald’s – ever since I started working there as a teen.
About what % of your revenue did you personally take home as income after operating costs?
I took home 15%, which was around $600,000 last year. USD that’s 572k.
What kind of qualifications is required to open a Mcdonald’s franchise (apart from money, is there certain critiera you must fulfill)? How much capital are you required to have to open a McDonalds and what exactly do you own?
You’re required to have a business degree, or a successful business career. You’re also required to put in $650,000 to help start up.
McDonald’s owns the land, and the building. That’s how corporate earns their money – through lease. I only own what is inside the store.
With the amount of gross income turning over, it seems like you’re a high paid employee, but you bear all the risk of a business owner. Does McD do anything to help you improve your sales or try maximize the profits from your property whilst you run it? Or do they just monitor it and show up from time to time to ensure everything is running smoothly?
Yeah, we have a long way to fall sometimes. But the benefit of operating under such a huge umbrella like McDonald’s is that you don’t have to market yourself, worry about stock issues, or innovation – that’s all done for you. All I have to do is make sure everything is working efficiently at my end.
What would you say is the maximum amount of McD you could run by yourself (without exceeding 40 hours per week)? Or is there no limit, as in, you could hire a district manager and regional manager etc.?
You could always hire a District Manager or something, it just comes down to whether or not you have the effort for it. For example I know of somebody in the country who owns 11 McDonald’s which are spaced throughout the country!
So I have to ask, what kind of car do you drive?
I drive a BMW M6.
NZ sounds quite isolated in terms of geography. Where were from your raw materials suppliers?
All local here in New Zealand. The only external goods we get imported is Heinz Ketchup. It’s great for the economy.
Will you expound upon this please? I’ve heard that McDonalds is actually really good for the local farm economy but most people don’t know that. What did you buy local and what did you import? did you see an overall positive impact on the farm and animal raining communities in your region? also: Totally jealous of your NZ locale. Want to go there one day. I’m sure I will, but it’ll be a decade or so from now.
Everything is sourced from within New Zealand. Eggs from Nelson, Bacon from Nelson too, Beef from the Waikato. It is a stable boost for the economy – it means the farmers and the providers have a steady source of income, which allows them to grow considerably.
Did you have to provide the recipes, or how this has worked? I mean there are buns, burgers, pies, ice cream, milkshakes, nuggets, particular type of potatoes… I would really like to know that.
From what I know, the suppliers were given the recipes, and we just order from them like you would normally. Corporate adjusts the recipes depending on what is available in the country, and they just make it work.
Do you consider MCD to have been a good franchise? Do you think you would have done better if you had opened a Taco Bell or a Wendys or something? The market just seems very saturated with McD. Seems like it would take some of the excitement out of owning one.
Overall, yeah, I consider my time at McDonald’s to be quite an eye opener of sorts. It’s kind of hard to say, but there’s always room for improvement, and there’s always “what if” scenarios. And yeah, to be honest, I am bored with McDonald’s. The first few months of a store’s life are always the most exciting – because you have to weed out the problems. It just gets so efficient that it bores me sometimes.
If we can put a man on the moon… Why can’t I have an egg mc muffin after 10:30?
Because we have to clean our grills in order to ensure food safety.. Sorry!
What was your best experience owning that McDonald’s?
To be honest, dealing with some of the staff that worked there. Yeah I admit, I was an ass at times, but they were all hard working guys. The Restaurant Manager always did their best to have an efficient and tidy store, and we both had a mutual respect for each other.
That and actually opening my store after a year of planning. The first day of operation is always a big one, and it is a huge relief to not only myself, but also the corporate team.
Since this is an AMA and you’ve been forthcoming when it comes to gross income, what was your net? What was the biggest portion of costs? Did you have any control over menu, pricing etc?
Last year, across my two stores the total turnover was just over $4 million, which was a little lower than usual. After expenses, We’d gross just over $3 million.
We had a surprising amount of control over the cost of our menu actually, as it all depends on our position in relation to the suppliers. That’s why Corporate always asks to ring your local McDonald’s for information when you’re asking them about pricing.
How much work was required of you per week on average? If my goal were to own one McDonalds and do the minimum amount of work possible, while also running it well, how low do you think I could get that weekly number of hours? And what would I be doing in that time?
I would work 9am – 5pm, 6 days a week. Mostly I’m at my office sorting problems remotely from there. I liked to pop down to my couple stores at least a couple times a day and check on them – make sure they’re clean, and to check on the Restaurant Manager about any issues. Typically I used to work hard for 4-6 hours a day, with the rest out in the stores just checking on them.
How much did you sell for?
I’m not stating exactly, but it was just above $1.4 million.
What’s the quality of food actually like there? I know people love to rant on about McD’s being horrible quality and packed with chemicals etc. but I have never read about what is genuinely in the food. I have always assumed the quality for such a dominant chain must be held to tight regulations and that maybe it is not as bad as people make it out to be.
Not doing a plug for Macca’s here, but the food quality is actually fairly good. No chemicals in them, at least not anymore and there hasn’t been for a fair while – they’re old wive’s tales. Sure – we might not use the best parts of the chicken for the nuggets, but there’s no beaky bullshit going on there.
How hard was it to manage your outlet in the beginning?
At the beginning, it was very difficult. But McDonald’s have some good processes in place for support of new franchisees, and they helped me immensely.
Were there any harshness from the McDonald’s corporation side of things when things went bad on your end?
They were very harsh – but fair. At the end of the day, I am an extension of their brand, and if something goes wrong, it is my fault. And its also my job to get it fixed, and ensure processes are put in place to make sure that it doesn’t happen again.
How much were you making a day on average just before you sold your outlet?
The average monthly gross income across the two stores last year was $341,462. Divide that by 30, which is $11,382 per day across two outlets, or an average $5,691 per outlet, per day.
In that time did you make enough money to retire? I know someone who started up his own comic book store and in only ten years he claimed he made enough money to retire and shut the store down and sold everything off.
After having my first store for 5 years, I could have retired and lived nicely.
How did you pull together the funds to purchase your first franchise?
I got a loan from the bank, but I easily paid it off within the first 10 months of operation.
So what’s next? How much money did you make annually? Will you make enough money from selling that you will be able to retire? Sorry to be so intrusive, obviously don’t answer if you’re uncomfortable doing so.
I really couldn’t mind! It’s an ask me anything 😉 Last year the two stores produced a combined turnover of just over $4 million. After 12 years of being with McDonald’s – yeah, I probably could retire. But I want to move into a field where I can actually make a difference and do something that I love, so I hope to keep working.
You said that you pocketed 1.4 million dollars from the sale of a restaurant. Why would someone pay you 1.4 million when they could open their own store for 600k?
Because the restaurant has already been established. The local customer base knows about it, and they will keep coming back. It actually seems to me like they’re not buying the business, but they’re buying the customer base.
If you’re not too fond of McDonald’s, then what is your favorite fast food chain?
I actually quite like Subway.
What made you choose mc D?
Initially, before opening my first store, I was actually a Shift Manager at a store around 80km from where I based these stores. I saw an opportunity for business, and I took it.
Anything that you could have done differently? In hindsight?
I would have pressed harder for a location nearer to the highway. We were on an offshoot, and I feel like the convenience of two of the stores were affected by this.
Was working at McDonalds as a shift manager your only job at that point? How on earth did you afford the franchise opening costs/liquid assets requirements?
It was my only job, and it managed to get me through University. I actually resigned from McDonald’s after I got my degree. I then got a hefty loan from the bank, and brought into McDonald’s. The bank said yes, as long as I signed up my company accounts with them, so that was done!
So you had no upfront out-of-pocket investment? it was all a loan?
It was all a loan, correct.
i feel like company get together type things are avoided so much in fast food when that would be an amazing thing for the culture of the workplace do you do anything like that?
When I had my two stores – yeah! We used to have Crew Days where we would go to the beach or something, and have a barbecue. There were about 70 staff at our last one (Late 2013), and it was a great time to forge some friendships and bonds between stores.
So you say it doesn’t pay off to own a McDonalds chain in New Zealand?
I’m not saying that at all as a generalized statement. The thoroughfare running through the McDonald’s location was falling, therefore sales were falling, hence why I have sold the store. Believe me though, owning a McDonald’s is one of the best things I have done.
How much profit did you make off of all of them?
A hell of a lot. I averaged $3.87 million dollars total turnover per year over 12 years of owning McDonald’s franchises, which is around $46 million.
How much control did you have over the shop, versus the corporate oversight of McDonalds Inc.?
To be honest with you, I have very limited control in the way the store was developed, and run. Color schemes, furniture and interior fittings are all ‘suggested’ by corporate. Operations-wise however is completely over to me. It is up to me and the Restaurant Manager to ensure that the processes are followed, otherwise we’d bare the brunt of the ‘corporate storm’.
With relatively high revenue in the business of most McDonalds, why pay the majority of workers minimum wage?
If I could pay you guys what you deserved, I would. Unfortunately corporate sets the pay scales, and I have to conform to them, sorry.
How much time/money you need to invest to open a fast food restaurant?
Money: $650,000. Time: A couple years of work.