Advantages to Starting a Franchise vs. Undertaking a Start-Up
Starting a business from the ground up can be very intimidating. A great deal of time, effort, paperwork and capital will be needed. Another option for people who want to be their own boss but don’t want to assume all the risks of starting a new business is to purchase a franchise.
An individual who purchases a franchise is known as a franchisee. The franchisee is given the rights to sell the goods or services under the brand’s name by the franchisor, or owner.
Operating under a well-known brand name is one advantage to buying a franchise instead of starting a new business from scratch. Another benefit is a well-established business model with market research, in-place training systems and strength in numbers that result in economies of scale when buying supplies and services- including advertising.
The protect the franchisee, the Federal Trade Commission (FTC) enacted the Franchise Disclosure Agreement in 2008 requiring than franchisors disclose certain information to prospective franchisees, within 14 days of signing the agreement.
The franchise disclosure document must include:
- General background information about the franchise-including length of time in business, competition, special laws that may apply to the way the franchise’s business is conducted, and special license or permit requirements.
- Any current or recent lawsuits filed by or against the franchisor or its executive board- including crimes involving fraud or violations of the franchise law and bankruptcy files of the franchisee or officers
- Costs associated with starting and operating the franchise, including franchise fees or deposits, inventory, signs and equipment
- Restrictions on suppliers
- Territory restrictions on where goods can be sold or what can be can be sold
- Trademarks that the franchisee will be allowed to use while operating the business
- The current financial state of the franchise
The initial investment required to start a franchise ranges between $2,000 -$100,000, according to Entrepreneur. Brian Petruzzi founder of 1000 Degrees Neapolitan Pizza requires an initial $29,500/unit franchise fee. The investment fee provides new franchisees the necessary tools to get the business up and running. “When you sign with us to be a member of the 1000 Degrees Pizzeria family we will provide you with full training inside our corporate stores along with complete guidance and support while you build-out your location. We will also provide you with all product distributor contacts and 1000 Degrees Pizzeria account discounts along with a protected territory around your locations. Multi-unit operators as well as local area developers are given discounts based on commitment. You will receive the rights and access to our proprietary recipes including but not limited to; our sauces, our dough and cheeses, our trademarks and the use of the 1000 Degrees Pizzeria brand name” says Petruzzi.
In addition to the initial investment, prospective franchisees may be required to pay monthly fees or royalties to the franchisor. Franchisors may also require franchisees have a minimum in liquid assets and net worth, according to Franchising.com. These terms should be expressed in the Franchise disclosure document.