A snapshot into the world of franchising and what to expect as you make the leap
Thinking about starting your own franchise? It’s a great way to fulfill your entrepreneurial dreams without having to build a name first. Read on for an overview of what it’s all about, some popular franchises to consider, and some of the costs involved.
“Franchise the damn thing.” Those were the words of former McDonald’s CEO Ray Kroc – portrayed by Michael Keaton in the 2016 film The Founder – as he set out his idea for world domination. And it certainly worked: according to Mashed, McDonald’s only owns about 5% of its venues around the world and still made $21 billion in 2019.
But what is franchising? Simply put, it’s when a business gives another business or individual the right to sell its product under its name. It’s an effective way for an entrepreneur to skip past building a recognisable brand – instead tapping into a proven business model.
Together with the right to sell its product, the ‘franchisor’ grants the ‘franchisee’ the right to use its name, logo, operating system, training, suppliers, marketing and equipment. While there are often hefty fees involved, the franchisee basically gets to piggyback on another business’ success while being their own boss.
The biggest franchises are found in the food and drinks industry – McDonald’s, Burger King and Dunkin’ are some of the top dogs. Anyone with their eye on going into business with one of them will stand a good chance of success because of their proven business models.
A McDonald’s restaurant, open in the US for at least one year by the end of 2019, made on average $3 million in 2019. A Dunkin’ drive-thru restaurant generated on average $1.3 million in 2019. And a traditional franchisee-owned Burger King outlet made $1.4 million on average in 2019.
But franchises can really be found in any industry. Some of the most popular are health and fitness brands like gyms and hair salons, brands that offer professional services like cleaning or help with your tax, and retail and hotel chains.
What are some popular franchises to put on your radar?
Now is a good point to note not all chains are franchises. So before you daydream any longer about owning a Starbucks, Chipotle or In-N-Out, these three household names prefer to go it alone. Use our search tool to find others – search the brand name and if it says ‘no franchises available’ or ‘no results available’, you’ve hit a deadend.
To give yourself the best chance of making a profit, you need to consider a few things. As with any business, researching what people want in your area should be your first port of call. There’s no point in starting a McDonald’s where the locals don’t eat much meat, or a 7-Eleven gas station in a neighbourhood where everyone owns an electric car.
You should also identify whether the franchisor offers good training and support, doesn’t charge fees that will break your bank, enjoys a lot of brand recognition and, perhaps most importantly, has a good reputation in the franchise world. If the brand offers few or none of those things, you may as well start your own business from scratch.
Focusing on the biggest franchise industries isn’t necessarily going to mean turning the best profit. This is partly due to the often exorbitant upfront costs you need to buy into these brands. But their big names will give you a good chance of doing well. Smaller franchises may be easier to get into, but their year-on-year revenue growth may be slow.
With globally recognised brands like KFC, fast food is unsurprisingly the biggest of the franchise industries, with retail and professional services not far behind. The biggest franchisor in the US is Subway with nearly 25,000 outlets. It practically dwarfs McDonald’s in second place with a few more than 13,000 units.
In the top 20 biggest franchises in the US, half belong to the food industry, six are professional services, two are retail brands, and two are health and fitness brands. But as the non-food brands are more niche, you’re better off looking at what products or services tend to be popular rather than simply choosing to franchise in ‘professional services’.
Here’s how the top 20 biggest franchises stack up:
- Burger King
- Jazzercise (health and fitness)
- Jan-Pro Cleaning Systems (professional services)
- Bimbo Foods Bakeries Distribution
- Pizza Hut
- Jani-King (professional services)
- Coverall (professional services)
- Taco Bell
- Wendy’s (food and beverage)
- Domino’s Pizza
- Health Mart Pharmacy (retail)
- Ameriprise Financial (professional services)
- Jackson Hewitt Tax Service (professional services)
- The UPS Store (professional services)
- Ace Hardware (retail)
- Great Clips (health and fitness)
What does it cost to get started?
No matter whether you decide to start a Great Clips or a McDonald’s, you need to have a fair bit of money in the bank already. Between the initial investment required for things like construction and equipment and an upfront fee (or ‘franchise fee), the start-up costs can rack up to a lot before you’ve made a single dollar.
And fees have broad ranges – from upfront fees ranging from hundreds to hundreds of thousands of dollars, to the initial investment required often reaching stratospheric amounts. The McDonald’s franchise fee is a relatively affordable $45,000 while the investment needed can climb from $1.3 million to $2.3 million. 7-Eleven’s franchise fee alone is a staggering $1 million.
The different fees can also have extremely wide ranges within a single corporation. Subway’s franchise fee can be anything between about $30,000 and $60,000. Bimbo Bakeries’ upfront fee ranges wildly from $14,565 to $525,450, with a similar range for the investment required.
On the more affordable end is Coverall with its two separate start-up costs ranging from $5,000 to $31,000. Cruise Planners can have a franchise fee as low as $495 while its highest investment amount sits at $23,376. Jazzercise start-up costs don’t go higher than $4,450 in total. And despite hefty investment fees, KFC caps its franchise fee at $17,100.
Many franchises do offer financial support, either internally or through third party lenders. But it’s important to keep in mind you may not be able to rely totally on that support. According to Mashed, 40% of the initial investment needed to buy into McDonald’s must be cash or non-borrowed assets.
Are there any ongoing costs?
The corporation you buy into will often charge ongoing costs. Each has slightly different fees but one that burns a big hole in your pocket with McDonald’s, for example, is the monthly service fee. It amounts to 4% of gross sales. This is the all important royalty fee that McDonald’s stockholders love.
There’s also the monthly rent for the premises. This varies on location and initial investment but according to the Service Employees International Union it’s about 10.7% of sales if we stick with the McDonald’s example.
If you get financial support to help pay for the start-up costs, obviously there’s going to be loan payments and interest. Imagine borrowing $1.5m at an interest rate of 5% and you can see how quickly expenses add up.
And don’t forget about the operation costs like marketing, payroll, supplies, equipment, back office support, security, point of sale integration and audit fees.
What support will I get?
Just like the fees, the support and training varies widely from franchise to franchise too. 7Eleven describes its training and ongoing support as ‘first-class’. It says that once they’ve made you an offer and you’ve accepted, “you’ll fly to the 7‑Eleven Store Support Center in Dallas, Texas, for our world-class LAUNCH training”.
The convenience store giant also boasts a resource center with seminars and events across the country “so people like you can learn all about franchising with 7‑Eleven”. Hair salon franchise Great Clips offers support not just at the start “but through every stage of your business” – from ongoing marketing support to help with ordering equipment.
Of course not all franchises have support systems as good as what 7Eleven and Great Clips appear to offer, but you should at least stick with those who offer basic training.
With a bit of research on the McDonald’s website, you’ll find that it offers “intensive, hands-on training programs”. This includes 12-18 months training in a restaurant and seminars, conferences and one-on-one training sessions. It also says it offers “local and national support in the areas of operations”.
Don’t just take our word for it – speak to an owner
While all the advice and figures in this article and on our website are provided on a best efforts basis, we encourage you to read more widely and do your own research too. Check out sites like the International Franchise Association, Franchising USA, 1851 Franchise and news sites like Forbes and Business Insider.
Speaking to local franchisees is a no brainer and we highly recommend contacting established owners to get the insider’s view on what running a franchise is really like. Franchise disclosure documents available on our website usually list their outlets’ contact details. Try calling and ask if any are willing to speak – it’s not as awkward as it sounds.
Please note that all figures in this article and on our website are provided on a best efforts basis and based on information provided in franchise disclosure documents. We do not accept liability for any damage, loss, liabilities or injury incurred.