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How to Start a Franchise Business

At a time of hyper-competition, when consumers can get to your competitors at the click of a button, and where brands have become vital to winning new customers, franchises are extremely attractive businesses. Rather than spending time trying to build a brand, and on learning the ropes of starting a business, an entrepreneur can utilize a franchise’s brand strength and onboarding experience to build a profitable business. Here’s how. 

Understand the Costs

A franchise business grants a license to licensees who are permitted to operate a business at a specified location, under the brand of the license. In return for this, an entrepreneur pays a franchise purchase fee, that is typically about $250,000 to $50,000. The franchise is required to maintain a minimum level of liquid capital. For example, service-based businesses usually have to keep liquid capital of between $50,000 and $60,000, whereas facilities-based businesses typically need between $75,000 and $100,000. You will also have to pay franchise royalties of between 4% and 12% of the franchise’s profits. In addition, you will face the usual costs of doing business, such as rent, staffing, and insurance. 

Find a Compelling Franchise

You can use resources such as Franchise Direct, to find the best franchises in industries you are interested in. The most important thing you need to figure out is if the franchise has a great product-market fit. Venture capitalist Marc Andreessen, has called product-market fit, “the only thing that matters”. It refers to the combination of a great product with a growing market that is hungry for that product. For instance, a franchise such as dermani MEDSPA Franchising is very valuable because of the growth in demand for spa treatments across the country. According to Statista, the industry is expected to double in size over the next decade, growing from $95 billion in value in 2021, to $185.5 billion in 2030. That’s an example of the kind of growth you are looking for.

Figure Out if You Can Be Profitable

Remember, not every franchise is worth the trouble, and even the best franchises, such as KFC, McDonald’s and 7-Eleven, still have failures. Even with quality onboarding and the world’s best brands, you can still fail. It’s on you to succeed.

You have to assess the costs of doing business, including franchise fees and associated costs, and weigh that against a conservative estimate of how much you will make every month, quarter, or year. You want to have a very conservative estimate of your revenues, adopting a worst-case point-of-view, and also have a worst-case point-of-view of your costs. Then, figure out if you can do business profitably under that worst-case scenario. If you can, then you’re golden.

Self-help gurus love to promote the idea that you should think positively. Well, in business, the reverse is true. You want to do a pre-mortem of your business. Once you have assessed the opportunities, the last thing you should do before asking for the franchise license agreement, is asking yourself, “If my business failed, what are the most likely reasons that it will have failed?” This will help you visualize any weaknesses in your plans, and solve those problems before they happen. Start with massive failure in order to map your path to success. 

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