Do You Want Franchise With That?

What’s in a name?

DoYouWantFranchise

Each month hundreds of thousands of new businesses open nationwide in the US. A third of them will go out of business within two years, and only half will last five years. Owning a business is risky, and what you don’t know will hurt you. Many small business fail because the owner failed to take into account some vital piece of information which would have shown that their brilliant plan wasn’t so brilliant after all. It could be anything from foot traffic, to utility costs, to labor utilization. What you don’t know will hurt you, often in the most painful way, at the worst possible of times. Trust me, I know. I’ve been trying to start my own coffee shop now for going on five years, and I have faced setback after setback. Although I have lost thousands of dollars in the process, I have gained valuable insight and protected myself from some truly significant financial pitfalls which would have occurred had I not been as diligent in my research, and hired qualified consultants, and legal and financial advisers first. I’d rather invest a few thousand dollars than suffer a million dollar bankruptcy.  No business is ‘risk free’.  

There are really only three ways to have your own business.

  • Start it from scratch – very risky
  • Buy out an existing business –  risky
  • Buy into a franchise – not AS risky, but still has risk.

“The two most important requirements for major success are: first, being in the right place at the right time, and second, doing something about it.” – Ray Kroc

What is a franchise?

A franchise is a business which pays a licensing fee to a parent company in order to sell products under that company’s brand. Usually there are strict guidelines and corporate policies which must be adhered to, which failure to follow will cause the loss of the license, and a possible expensive lawsuit. By franchising, YOU are representing that brand, even though you own the business, the brand and all its intellectual properties belong to the licensing corporation.

There are pros and cons to this.

The pros include selling a known brand, and operating under a proven business model. Everyone knows what the coffee at Starbucks and Dunkin’ Donuts is supposed to taste like, and they are drawn to the familiar industry standard product they know and love. 

The cons are that those same industry standards and products are forced upon you. If you are barely scraping by, and the parent corporation implements a national sales campaign, more often than not you are required to participate. Likewise when chains like McDonald’s offer their McCafé®™ drinks at only $2.00 for any size, every McDonald’s franchise in that geographic area  has to offer that product at that price, even if they are losing money to do so.

When an industry leader announces a new product or sale, other chains scramble to offer a comparable offering. Prior to Starbucks offering cold brew coffee, that was something that you could only get at third wave coffee shops. Now cold brew coffee is everywhere, even at convenience stores.   When Starbucks began selling Pumpkin Spice Lattes earlier than normal this year starting on Labor Day Weekend, Dunkin’ Donuts and other chains quickly followed suit. This meant that the owners of every franchise suddenly had to purchase additional supplies needed for the drinks.

Franchises are not cheap. In most cases you have to pay to build the store to company specs, and buy all of their required equipment as well as pay an upfront fee.  Dunkin’ Donuts franchise fee is $40,000, minimum initial cash required is $250,000 with a net worth at least $500,000. Starbucks doesn’t do franchises, but they will sell you a license to sell their coffees at your cafe for just over $300,000. McDonald’s charges $45,000, requires you to have liquid assets of $750,000 and start-up costs  run  $1-2 Million. One of the cheapest franchises to start is SubWay, which begins at $15,000 with start-up costs ranging from $100,000 to $400,000.

Once you pay to start the franchise, you still have franchise fees on every product you sell for as long as you own the franchise, and IF you decide to sell the franchise, in some cases you will need to pay a franchise transfer fee.   

Can you make money owning a franchise?

Yes, and no. According to a report on food franchising by Franchise Business Review, 51.5 percent of food franchises earn profits of less than $50,000 a year; roughly 7 percent top $250,000, with the average profit for all restaurants coming in at $82,033. That doesn’t sound too bad, until you factor in the initial investment.

Business is business? What a Kroc!

Ray Kroc was a traveling salesman.  He had been a paper cup salesman for Lilly Cup.  After fifteen years, he switched companies and  started selling a 30lb, five-spindle milk shake mixer, The Multimixer for Prince Castle.  There wasn’t a great demand in the food service industry for this device, he was lucky if he could sell one to a restaurant. That was until he received an order in 1954 for eight of the machines placed by a single restaurant in San Bernardino CA. After confirming that the order was not a mistake,  he made a trip out west to see with his own eyes this business that needed eight Multimixers.   The place was a tiny burger joint owned by two brothers, Dick and Mac McDonald. Ray Kroc was so blown away by the way the brothers had re-invented drive-in burger joints that he mortgaged his house and pulled every string he could pull to get the brothers to agree to not only allow him to buy his own franchise, but sell future franchises to perspective buyers.

Ray Kroc was 52 years old when he opened his first McDonald’s franchise. For each future franchise he sold for the brothers, a franchise fee would be charged of 1.9% of sales, .4% would go to the brothers and 1.5% was for Ray. Needless to say Ray Kroc was struggling to keep his head above water before long, and tried to re-negotiate his deal. Dick and Mac refused. Ray had signed a contract and he was legally bound to it. Unfortunately for the two brothers, Ray was a salesman, and they were not. A salesman’s number one job is to convince someone to buy. Ray managed to find a work-around by creating a land acquisition company.  He bought and leased the land that McDonald’s franchisees would need to  build on and charged them rent. As a condition of their lease agreement they had to maintain quality control in their restaurants, or lose their franchise.

He began mass selling franchises, and the money from the land lease agreements made him wealthy. He then paid a hefty fee to the McDonald’s brothers of $2.7 million dollars to break the 1954 contract he had signed, and take ownership of all holdings and intellectual property, including the brand name. The McDonald brothers couldn’t even have their name on their own restaurant. He then opened his 100th store right across the road from the brother’s original store, and drove them out.

History is written by the winners.

The first time I read the Ray Kroc story, it was in his auto-biography GRINDING IT OUT The Making of McDonald’s. From Ray Kroc’s point of view, he was the victim, fighting his way out of a bad deal. I had found the book to be inspirational until I saw the 2016 film THE FOUNDER starring Michael Keaton. This version of the story made Ray Kroc look like the Serpent  in the McDonald brother’s Paradise. He was the epitome of every sleazy, used-car salesman stereotype you can imagine.  There are two sides to every story, your side, their side, and the truth. The point is once you sign a contract for a franchise or a lease agreement, be prepared to stick to the agreement, because unless you have more money and lawyers than the opposition, you will be in hot water quickly. It’s probably best to avoid the situation altogether. As always, I wish you success and happiness.  

Author: instantcoffeewisdom

I am a lifelong coffee enthusiast, a poet, and I am in the process of opening a cafe!

One thought on “Do You Want Franchise With That?”

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