The Economics of Buying a Franchise

Of all the small business opportunities available, perhaps the one that is most attractive is franchising.  After all, you'll be representing a company that already enjoys the advantages of brand name recognition and customer loyalty. 

But even though owning a franchise may look attractive, you have to be sure that the economics of doing so are in your favor.  That's why I compiled this compact guide to franchises.

Franchises are a large part of the burgeoning retail market.  According to industry statistics, a new franchise opens somewhere in the United States every 17 minutes!

The advantages of franchisee selling are:

  • Increased geographical spread of sales
  • Reduced risk of failure, especially loss in sales caused by competition
  • Reduced cost of distribution and distribution management

The disadvantages of franchisee selling are:

  • Loss of control through decentralized selling
  • Binding contract
  • The franchise's problems are your problems

The cost of buying a franchise can vary from a few thousand dollars to a few hundred thousand dollars, with the franchise fee being directly proportional to projected revenue, which is calculated on past revenue and projected future demand. Therefore, a franchise that is projected to earn you $100,000 in the first year would be far more expensive than a franchisee that is projected to earn you $10,000 in the same period of time.

The kind of franchise you can buy depends on the amount of capital you can invest.  Your income earning capability, based on projected demand, will define your choice of franchise.

Buying a franchise can be an exciting and profitable business opportunity as the risks are comparatively limited.  However, before investing in a franchise, you need to study the market and the competition to ensure that you will be able to earn enough income to earn a profit over and above the franchise fee, infrastructure costs and operating expenses.

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