In this issue
Try this: Should you consider owning a franchise? Here’s some insight.
Apply for this grant: $5,000 from Simply Business®.
In the news: Hiring is up at the smallest companies.
So you want to own a business. Is franchising the answer?
My first job was at a Dairy Queen. Yes, I can still make a soft-serve cone with a curl on top. No, this newsletter isn’t about that.
Dairy Queen, like many fast-food restaurants, uses a franchise model. At mine, corporate sent training videos, embroidered polos and recipes for the Blizzard of the Month. We could call other DQ locations when we ran out of the company’s proprietary ingredients. But our paychecks came from the owner’s LLC, not from DQ itself.
I never asked the owner why he chose to open a Dairy Queen instead of an independent ice cream shop. (I was in high school and mostly preoccupied with my calculus homework.)
So instead, years later, I took my questions to Andrew Titus, president at United Franchise Group. UFG owns nine franchise brands. Titus was previously the president of Fully Promoted, whose stores offer screen printing and embroidery.
I’ve edited the following answers for clarity and brevity.
What’s your elevator pitch? What’s good about owning a franchise location?
The benefits boil down to four main things:
Brand recognition — people know the brand, they’ve seen the brand. There’s advertising at a large scale.
Mass purchasing power — being able to get discounts and better deals because everyone’s purchasing from the same vendors, versus one single person purchasing from something.
Training and support — being able to help people while they’re going into business and as they’re in business.
A proven program — we’ve been able to do this time and time again and launch successful franchisees.
What specifically does corporate training and support include?
It’s the marketing materials, making sure the website’s all set up and customized for their location, email addresses. We order all the location fixtures and furnishing and equipment, and we handle all that delivery and processing. We send someone to the location to make sure everything’s in place and all put together the right way.
We hold their hand on the launch of the process too. From the second day entering a franchise agreement with us, they go to an individual who will walk them through a 20-point checklist. It could be simple things, like filing an LLC or opening a business bank account. Then, once they’re in business, it’s having the vendors already lined up, so they don’t have to search or negotiate deals or contracts with new vendors.
What are the costs associated with owning a franchise?
There are four main buckets for the initial cost:
The franchise fee. That’s for the brand, the trademark, the logo, the right to do business, the owner’s manual of operation. It’s really the entry point into the franchise. It also covers the training. A lot of franchise companies, like ours, will pay for owners’ flights to come to training school.
The equipment package. This involves everything that’s in the location. It could be stuff that’s physically in the location, or it could be subscriptions, like their point-of-sale system, lead generation software or QuickBooks.
Leasehold improvements. In most businesses, you’ll have to pay to make sure the space is up to standards to open the business and get equipment delivered.
Working capital to help run the business and scale it long-term. We have different budgets that we recommend for working capital depending on the industry.
On an ongoing basis, there are a couple of main fees:
The royalty fee. You may call it a licensing fee as well. Typically those are between 6% and 8% of monthly gross sales. A lot of times franchise companies have a minimum, so a brand might be $500 or 6%, whatever is greater.
The advertising fee. That usually goes to an advertising fund or a marketing fund that’s solely for advertising and marketing the franchise company, to market the products to help the franchisees. That’s typically 1%. I’ve seen it up to 3% for food brands. There’s usually a minimum with that as well.
A technology fee, which covers your email addresses, the websites, some of the software the franchisor requires the franchisees to have. Some of our brands have a technology fee of $150 to $200 per month.
Can any of those startup costs be financed?
We take it on a case-by-case scenario. Typically, we can get people up to about 60% to 70% of the total investment financed.
We don’t do business with people if they want to finance 100%. That’s just not healthy, because you’re not setting someone up to be successful in the long run. We want them to have skin in the game. We prefer not to go into financing at all, but some brands, especially food brands, are going to need it.
Is there anyone who really isn’t a good fit for franchise ownership?
Number one is, you’ve gotta do it full time. If someone’s looking for a passive investment, to me, that’s a “steer away.” In most franchise companies and businesses, it’s a full-time business.
Number two, are they going to put an emphasis on sales and marketing? Regardless of the industry, I think that’s very, very important.
Number three is making sure they’re well capitalized.
And number four is culture and fit. Are they going to follow the system? Are they going to work hard? We want to see if they’re going to follow our steps when they’re in business with us. At the same time, a lot of our best ideas over the years have come from franchisees who say, “what if we did this, and what if we innovated with this?”
So, should you own a franchise?
Franchises have a slight edge when it comes to surviving their first few years, according to research from the University of Michigan Ross School of Business. Their one-year survival rate is about 6 percentage points higher than independent businesses. That rises to 8 percentage points for making it through year two.
This is probably a signal of how tough marketing a new business is. Plus, researchers say franchise companies screen potential new owners, which could mean they’re choosing people who are more likely to succeed thanks to their access to capital, education or experience.
That said, the research also found that franchises’ advantage disappears after two years. And the report emphasizes that franchising isn’t a safer (or riskier) option by default.
What’s right for you? Here’s how I see it.
Start an independent business if:
You have a specific, unique vision for your product, vibe or business model, and you want the flexibility to take the business in new directions if your vision changes.
You like having control over the little stuff, from brand colors to scheduling software.
You want to experiment to see if owning a business is truly right for you.
Consider a franchise if:
You’re ready — financially, organizationally and even emotionally — to own and operate a business today.
You really love that particular brand.
On the flipside, you’re committed to owning a business but aren’t attached to one specific idea.
You’re OK making tradeoffs on little things, like those brand colors and scheduling software, as well as big things, like how you can evolve in the future.
How do you buy or open a franchise?
Most brands that operate using a franchise model have a website where you can request more information. Fill that out, and someone should contact you with more information.
If you decide you’re interested, most brands have a “discovery” process. You and the brand do due diligence on one another during this time. You may also need to negotiate on location — brands often don’t want two sites operating in direct competition with one another. You might have the chance to buy an existing franchise if a current owner is looking to sell.
From there, the process is similar to opening any other business — form a business entity, figure out how to cover your startup costs and outfit your location.
If you end up opening a Dairy Queen, keep an eye out for me. I always stop on a road trip.
Grant opportunity: $5,000 from Simply Business
NerdWallet’s Karrin Sehmbi finds and shares these grant opportunities.
Online small-business insurance broker Simply Business® is offering its Big Dreams Grant to five business owners. Each grant is worth $5,000. Winners also receive a yearlong membership to Simply Business’s mentorship and accelerator program.
The company will also offer a six-month membership to this program (but no grant funding) to 20 runners up.
The application is currently open and will close on June 18. To apply, you’ll need to fill out an online form that asks for a couple of short-answer responses in addition to basic business information. You’ll need to explain why you think you deserve to win the grant plus how you plan to use the money and make use of the mentorship program.
The usual eligibility requirements apply: You must be at least 18 years old and a legal U.S. resident. Additionally, your businesses must show a minimum gross revenue of $25,000 over the past 12 months.
Check out our complete list of small-business grants for more upcoming opportunities and grant deadlines to set alerts for. My colleague Randa Kriss updates this list regularly.
In the news: The smallest companies are hiring the most
As wave after wave of layoffs makes headlines, new research suggests mom-and-pop businesses are keeping the labor market afloat.
Businesses with fewer than 20 employees added 169,000 jobs between January and March, according to ADP Research. That’s more than any other employer category, including large corporations.
Small companies may be getting more attractive to workers too. The turnover rate at companies with fewer than 50 employees is now less than 4%, the lowest on record.
And the difference in pay growth has shrunk significantly from spring 2022, from 3.8 percentage points to 2.3 percentage points.
If you’re starting a small company and need to hire skilled workers, now might actually be a great time. Your much larger competitors probably aren’t hiring much. And they’re not offering fast-growing salaries the way they were a few years ago. Post a job and see who applies — you might be pleasantly surprised!