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Buying a franchise: An almost risk-free way to start a business or just plain stupid?

“Don’t watch the clock; do what it does. Keep going.”

– Sam Levenson

Setting up a franchise vs. growing a business organically

Every once in a while, you get reminded by an ad that starting a business from scratch is not the only way to become an entrepreneur…

…because, as they say, there’s always the option of franchising!

The ‘good news’?

There are more than plenty of franchise opportunities available out there.

Famous examples include McDonald’s, 7 Eleven, Hertz, Carrefour, Papa John’s, Avis, Supercuts, Smoothie King, Taco Bell, etc.

So, how does franchising work?

Franchising In A Nutshell

On the one hand, you have the franchisor, typically, an established brand willing to license the right to use the firm’s business model and brand to a third party for a prescribed time-period. On the other hand, you have the franchisee, an individual or firm granted the license to run a business based on the franchisor’s ‘operating model.’

And yes since there is no such thing as a free lunch, the franchisor requires for granting this right to get paid:

a) An upfront fee (that could range anywhere between a $1,000 to $500,000 depending on the franchise brand name and track record)

b) A monthly commission cut (aka management service fees) based on the store’s gross revenue that can be as low as 3% or as high as 20%, also depending on the type of brand you’re dealing with

All clear so far?

Good!

Let’s now move on to the why behind many aspiring entrepreneurs’ decision to jump-start to entrepreneurship by becoming a franchisee.

4 Reasons why new entrepreneurs jump into franchising

So, what are the arguments for becoming a franchisee?

Well, according to the advocates of this business model, it mainly boils down to these 4 reasons:

a) You buy ‘a tried and tested’ format

And the assumption here is that since a franchisee practically is given the right to copy a debugged product/service (or at least that’s the claim) which has already proven to work elsewhere, the chances of making it are much better than setting up a completely new business from ground zero.

Also, a by-product of choosing a reputable franchise is that most prospective customers will already know and trust the brand so you won’t have to spend months upon months making a name for yourself and building credibility for your business.

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