Investing in a franchise business is not exactly like buying an independent business. When you buy a business, you’ve made a purchase, and once you’ve paid for that purchase, you’re probably through with the people you purchased that business from. You’ve got their customer list, their intellectual property and trademarks, and the building and fixtures. It’s yours.
With a franchise, you pay initial fees for the right to use the trademark and other intellectual property, and for ongoing support of various kinds, which vary from one franchise to another. You also pay ongoing fees. These fees include royalties and perhaps also a marketing fee that is pooled with the marketing fees of other franchisees.
What do you get for the ongoing investment?
- R&D. Research and development results in new products, new services, improvements in the system, and great ideas. Top companies spend anywhere from 3% to 17% of sales, according to Business Insider, and that’s a gamble your individual franchise probably couldn’t take. A small independent business will always find it challenging to develop new products, and often there is no testing when they do come up with a new idea. They just throw it out there and hope people are willing to pay for it. Franchisees get to take advantage of the R&D capability of a large corporation.
- National marketing. The cost of shooting a single high-quality commercial ranges from $63,000 to $8,000,000 dollars, according to a recent study, and the cost of national broadcasting time is over $10,000 per second. National magazine ads run $250,000 for placement in a monthly magazine and anywhere from $500 to nearly $400,000 for creation of the ad. Small independent businesses can’t afford national advertising. Your individual franchise probably wouldn’t be able to hire a celebrity and create a major national ad campaign, either, but your franchisor may. You and all the other franchisees benefit from that investment. You also benefit from all those years of marketing the franchise has done before you even joined the team.
- Ongoing support. Being in business for yourself is challenging, exciting, fun, and rewarding. Many independent business owners, however, have no one to reach out to when they have questions or concerns. Franchisees have not only the franchise, but also the franchisee community. Being able to ask advice from others who are in the same position you’re in can be extremely valuable. Getting input on how to use a system from others who use it and from the people who developed it has value that’s beyond measuring.
Each franchise approaches these three things differently. Yours might have intensive research and development that means new products every season, combined with extensive marketing that brings new customers in to enjoy every new product, and an annual convention that sends you back to work informed and inspired. Or your franchise might invest in market research reports and share that knowledge, provide ad slicks for you to use in local media, and have a number to call when you need support.It makes sense to ask, and to evaluate ongoing costs in light of what they’re paying for.