Buying and Incorporating a Franchise
In the past here at Incorporation-e, we’ve discussed whether it’s better to buy a franchise or open your own unique business. From an incorporating perspective, the processes for both options are essentially the same in most states.
But from a business perspective, it’s a very significant decision.
While franchises are great in the respect that you get support from the corporate office among other things, they’re also expensive to obtain and come with strings attached. If you’re looking for less risk, a franchise may be the way to go but it all really depends on your particular goals and situation.
(Read more about buying a franchise vs. opening your own business in our prior post)
If you ultimately decide to pursue the franchise route though, there are a few things you will need to think about before opening that next Subway or Dairy Queen.
One is costs…
In a typical franchise setup, you will have the following costs:
- Initial Franchise Fee and Setup Expenses
In exchange for consulting and using the company’s name, you will pay a fee, which sometimes can be tens of thousands, to the franchisor. There are also other costs like equipment, procuring a location and any licenses and insurance. Also, many franchisors may have a “grand opening” fee to promote their new outlet.
As with any business, you will also need to consider your staff as well.
- Continuing Royalty Payments
This essentially pays for the right to continue using the franchisor’s name. These fees may consist of a percentage of your weekly sales or monthly gross income. Even if your business isn’t earning much income, you will likely have to pay royalty fees. Also, you’ll likely be obligated for an entire term so if your business closes, you will likely have to pay the royalty fees until the end of the agreement.
- Advertising Fees
Another common cost for franchises, many companies require its franchisees pay into an advertising fund. Each company allocates these funds differently.
Another characteristic of franchises is that they are, understandably, more controlled.
While this can be helpful, it can also be frustrating if your reason for wanting to own a business is true independence.
However, franchisors usually assist their franchisees in a variety of areas, including site location, upstart, etc. Often times, they will have to approve the site before you open. Other restrictions like what you can sell, design or appearance of your storefront and method of operation may be directed by the franchisor.
If you’re considering a franchise, it would be wise to research the particular company and franchising in general. The U.S. FTC has some good resources on what to look for.
And remember – whenever you decide you want to incorporate your business, whether it’s a franchise or your own business, MaxFilings can help you easily form a corporation or LLC in any state in the U.S.