Original text

If you are considering buying or selling a business, SCORE just completed five videos in a four part series addressing exit strategies and purchasing a new business. You can view all SCORE Business TV episodes, including the ones on how to buy or sell a business on the SCORE Manasota website. With this video, we're beginning a new series about Buying a Franchise.

Benefits of Franchising

Today, we're addressing the benefits about how to buy a franchise business. We'll be exploring what a franchise is, what types of franchises are available, how to choose the best one to fit your needs, and the cost of buying into a franchise and operating a franchise. SCORE is a 55-year-old nationwide non-profit organization providing free mentoring services to business owners. Our SCORE experts are here to guide you safely through that minefield.

Buying a Franchise, What You Will Learn

In this video, host Dennis Zink and his two expert guests, Jenny Sutter and Bob Melberth,​ discuss the following topics:

What a franchise is

The difference between a licensing agreement and a franchise agreement

The percent of franchises in business after 10 years

Why franchise systems work well for restaurants

How many different industries franchise

How to choose the best opportunities

How much it costs to get into a franchise

When is the best time to acquire additional units

Understanding the first right of refusal

Is there a difference in building equity in franchise units versus non franchise

Franchise profit margins

The cost structure in buying and operating a franchise

Understanding how royalties work

Understanding advertising fees

The franchise operating license term

Understanding renewal fees

Why it’s easier to finance a franchise business

What the ROBS program is

How FranNet can help with financing through FranFund

What the SBA franchise registry list is

What the Franchise Disclosure Document is

FTC required franchise documentation

Why veterans make good franchise owner/operators

Who makes good franchise owners

Why franchises fail

How franchisor and franchisee support is helpful to success

How to expand a business and consider becoming the franchisor

What Fees are Involved When You Buy a Franchise?

“Going into buying a franchise, you have to pay that upfront franchise fee, and then beyond that, you're going to pay ongoing royalties. Those can be structured in various ways, whether it's a monthly percentage of gross sales, whether it's a flat fee on a monthly basis. When they start, is it two years in? Is it immediately? Those are royalties that you do have to pay. Also, not all franchises, but quite a few of them make you pay into what's called an ad fund or an advertising fee, so that also would be a percentage of gross sales generally or a flat fee on a monthly basis. There's even some that will charge a technical fee, so depending on what kind of technical aspects there are to the business,” said Jenny Sutter.

“The average royalty is about 6.75, so between 6% and 7.5% is the average. Now, they go higher depending on the kind of service or the kind of franchise that you're buying into, but then it does again vary from an advertising standpoint. Whether it's 1%, 2%, or a flat fee, so it really does vary franchise-by-franchise basis based on what they're providing you in return,” Sutter added.

What Profit Margins Can a Franchise Make?

“The only thing I'd add to what Jenny just said would be, if indeed you operate to the end of your term, because every franchise has an operating license term, five years, 10 years, McDonald's was 20 years, you can renew that license if you've operated properly and the franchisor wants to renew with you. Many times they do have a renewal fee that would be at the end of your timeframe for your operating license,” said Bob Melberth.

“If you've got to make an investment in real estate, physical facility, equipment, etc, then I believe that the profit margins may be a little lower in that type of business. If you're offering a service and you are perhaps using your talents and skills and that's really the only cost you have, one of my businesses was as a consultant and so I didn't have a whole lot of costs built in. That one may have a better profit margin, but you're also limited to your 168 hours a week that you have to deliver the product,” added Melberth​.

Host

Dennis Zink, SCORE Manasota Chapter Chair

Guests

Jenny Sutter​, Franchise Consultant and owner of FranNet

Bob Melberth​, Volunteer SCORE Subject Matter Expert

Next SCORE Business TV Episode

Where is the Money?

SCORE Can Help

To get help buying a franchise, request a free SCORE mentor by completing this form today!

SCORE Business TV is Sponsored by