Franchise Myths - Part 1

By Mike Martuza

A myth, fable, tale, legend - things whose existence are, or were, widely considered to be true but are in reality fictitious. Every sector of our society has a set of myths and franchising is no different. These myths are so prevalent, and still in this day and age so believed, that they keep many people who are searching for their next opportunity away from even considering owning a franchised business.

There are far too many franchise myths to cover them all at once, so I'm going to address three of the six most common in the first of this two-part article.

Myth 1: Franchises are all about fast food and retail

This myth is very common and it's not hard to understand why. Periodically I ask people that I work with to quickly name 5 franchises that are not fast food concepts - the majority of people are not successful. The public is constantly bombarded by TV and radio commercials for food establishments as well as the unending neon lights of the chain restaurants on the highways. This saturation of the senses can easily lead to the belief that Fast Food = Franchise.

In reality only a small percentage of franchises involve fast food. In the US there are over 3100 franchise options in more than 80 industries. The large majority of these opportunities are service-based businesses, either business-to-consumer or business-to-business. Currently some of the most popular franchises are in education, health care, home upkeep/repair, damage mitigation, corporate expense reduction and the IT services industries. Franchising mirrors the economy; over the past 50 years as our economy has become increasingly service-based, franchising has done the same.

Myth 2: Franchises are very expensive

This myth is a natural extension of Myth 1, "Franchises are only fast food and retail." Many of the better-known brands in these industries will cost in excess of one million dollars per location to open. This extraordinary price is primarily due to the cost of building out your location to the franchise company's specifications, inventory, equipment and the need to lease a prime location. Having a constant and appealing look are absolutes in situations where the customer comes to the business. By contrast, the cost to get into a service-based business is usually substantially less expensive. In a service business there is little or no requirement for an expensive build out (the business goes to see the customer), inventory or prime real estate. I will write more extensively on the costs involved in buying a franchise in an upcoming article.

Greater than 50% of all franchise opportunities in the US cost less than $100,000 to get up and running (Franchise Fee + Additional Costs + Working Capital). At the lower price points many of the franchises involve the owner being the only employee. As the only employee the owner only makes money when s/he is working. If, on the other hand, the person were looking for a larger opportunity they generally would need to start looking at ventures in the $75,000 - $100,000 range. In this range there are numerous opportunities that provide the franchise owner with excellent growth potential.

Myth 3: The larger the investment, the larger the potential return

Most people correlate investment level with return - you get what you pay for. In general the services based franchises (business-to-consumer and business-to-business) provide a much higher margin than do the food or retail concepts. In a good fast food restaurant you would expect less than 10% of revenue to drop to the bottom line, while it is not uncommon for services business to achieve greater than an 18-20% margin.

The other factor to take into consideration is how fast the business can begin to make money. In a food or retail business it might be more than a year between starting to pay for the business and getting the door open for the first customer. Finding suitable real estate and the build out can often take more than one year to complete. In a services business many franchise concepts can have the owner open for business only a month to two after buying the business.

The potential for greater margins aside, significantly lower cost of entry and the ability to be in business sooner has made the service-based businesses the most popular area of franchising.

Hopefully I have dispelled some myths about the industries in which franchises participate as well as some regarding monetary issues like investment and return. In the second part of this article I will focus on the final three of the most commonly held franchise myths.