Reasons You Should Buy a Franchise (and Reasons You Shouldn’t)

It can be a wonderful, game-changing investment, but caveat emptor.

Crawley, UK - July 24, 2012: Subway Restaurants are one of the largest food franchises in the world and this picture shows a new purpose built unit near Crawley town centre. Subway are suppliers of sub sandwiches and salads.
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Their experience is typical. Franchises can cost as low as tens of thousands of dollars to a little north of a million, which is what anyone buying a McDonald's can expect to pay, or even more (a Denny's will cost you $2 million). Why are these businesses so expensive? You're paying for everything from leasing commercial property to buying inventory and equipment to paying the one-time franchise fee, which gives you permission to use the franchisor's signage and logo. For comparison's sake, Subway's franchise fee is $15,000. Mr. Rooter, the plumbing service, has a $29,500 franchise fee. You'll also pay the corporate office an ongoing royalty fee every year, which is essentially a percentage of your business's sales, and you may have to contribute to a marketing fund.

2. It may be less risky than starting your own business, but it is still a risk. The UPS Store is a strong brand, but the recent recession was strong, too, and when the economy cracked several years ago, the Saunders' store couldn't withstand it.

"Customers who had been doing next-day air packages, which had a better profit margin, began saying, 'Well, it doesn't need to get there tomorrow. It can get there in three or four days,'" recalls Robert Saunders, adding that small businesses that rented mailboxes from them began shutting down as well. "That was our bread and butter," he says.

In 2009, they closed their business, five years in the middle of a 10-year contract. After UPS adhered to its formula for franchisees breaking contracts, the couple wound up paying a fee of $23,000 to their franchisor.

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But it's not all gloom and doom. Robert Saunders, who retired from Edison in 2011, still speaks well of the UPS Store, and being a franchisee gave him an idea for the business he and his wife started in 2010: College Storage & Student Services, which stores belongings for college students who can't take their furniture and belongings with them back home and can't leave them in the dorm or their apartment over the summer.

"We saw a lot of college students coming into the UPS Store, needing to ship things and being stressed out," he says.

So owning a franchise helped them, and it hurt them. The Saunderses, in fact, won't forget their experiences any time soon. Four years after closing their UPS Store and nine years after opening it, they are still paying off their SBA loan.