When Rowley Mayo, 62, was downsized from his job as a finance executive in 2009, he wasn’t ready to stop working. But Mayo soon learned that companies weren't lining up to hire workers in his age group, especially those accustomed to earning six-figure salaries.
See Also: How to Finance a Franchise
Rather than accept early retirement, Mayo, who lives in Elk River, Minn., decided to start his own business. While researching opportunities, he consulted with a franchise broker who introduced him to Mr. Appliance, a home-service appliance-repair company with 148 locations in the U.S. After talking with franchise owners and company executives, he launched his franchise serving the Minneapolis suburbs in December 2010.
"I was looking for a business that was, as much as possible, recession-proof," Mayo says. Because franchisors offer extensive hand-holding, franchisees don't necessarily need expertise in the product or service they'll be selling. Mayo didn't know anything about appliance repair, but he believed that his years of management experience would enable him to find employees with the necessary technical skills. In addition, Mayo says, the $27,000 franchise fee was a bargain compared with the cost of buying the sophisticated technology needed to start an appliance-repair business from scratch. "It would cost you a fortune to duplicate what you get in a box from Mr. Appliance," he says.
For wannabe entrepreneurs, franchises offer a proven business model, says Joel Libava, a franchise consultant and author of Become a Franchise Owner! "You can get into business really fast," he says. "In a good system, mistakes have been made, kinks have been ironed out."
A typical franchise agreement gives you the right to use a franchise's name and business system for a specified period of time, which can run anywhere from five to 20 years. You may receive training, help in finding a location, management advice and ongoing support. Many franchisors also provide national advertising and marketing.
Buying an established business model doesn't come cheap. Start-up costs, which include the franchise fee, inventory, insurance and equipment, range from less than $25,000 to more than $1 million. In addition, Libava says, most franchisors require franchisees to have a net worth of at least $350,000, of which $50,000 to $60,000 must be in cash. Some well-known companies have much higher thresholds. Jiffy Lube, for example, requires franchisees to have a net worth of $450,000, of which $150,000 must be in cash. In addition, you'll probably have to fork over a percentage of your monthly gross revenue. The average royalty fee is 6.7%, according to Franchise Direct, an online directory of franchises for sale.
The bottom line, then, is that you assume most of the losses if the business flops, but you'll be required to share the rewards if it succeeds. For that reason, you shouldn't rely on the franchisor to help you decide whether the business is a good investment. A franchise broker can help you identify a franchise that fits your finances and interests. Begin your search at www.franchoice.com, or try www.franpointpartners.com, which specializes in restaurant franchises. Web sites such as www.franchise.org and www.franchisebusinessreview.com can also provide information about franchises for sale. Franchise expositions also showcase opportunities. And, check out our list of eight franchises that have reasonable start-up costs and bright futures.
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Before you invest any money, conduct your own financial analysis, says Bob Papes, a small-business consultant in Henderson, N.C. Far too often, says Papes, franchise owners fail to estimate how much money they'll need to earn to cover their initial investment in franchise fees, materials, overhead, salaries and other costs. Only about half of small businesses, including franchises, survive the first five years, according to the Small Business Administration. "If you don't know your break-even point, you're probably going to be in trouble," Papes says.
Other factors to consider before buying a franchise:
The rules. In most cases, you'll have to adhere to a long list of restrictions that cover everything from the signs you post to the prices you charge. Want to offer doughnuts and coffee to the customers of your dry-cleaning business? If it's a franchise, it may not be allowed, Libava says.