A franchise is a sale of the rights to use an established trade name, supply sources, national advertising support for a given territory or area.
Examples of franchises include McDonald’s, Wendy’s, Arby’s, Shell Oil, Seven-Eleven, Dunkin' Donuts, True Value Hardware, Pepperidge Farm and these days in some rural areas you can even get a cable franchise such as Time-Warner.
The cost of a franchise is based upon the reputation, service area and the amount of time the franchise has existed. A fast-food franchise like Arby’s Roast Beef can cost upwards to a million dollars, but they do almost everything for you. They help you find a location, secure lease or purchase of the property, bring in contractors to do the building, provide you with suppliers for the food or stock, train you to hire and manage employees.
In the case of something like True Value Hardware you have to get the entire stock of what they carry, even if you are positive you’ll never sell it. You must also re-order through them, however you can probably order a few items from outside sources at times.
We talked with someone who got an entire major city as an area when Pepperidge Farms first started their cookies. These cookies, back in the late 1960’s and early 1970’s, were quite expensive but good. A 12 ounce pack of cookies was $2.50 retail while you could get a whole pound of Oreo’s for about $2.00.
The cost of the franchise, because Pepperidge farm was just starting out in the cookie business, was only about $150,00 around 1970. It was a one or two man operation. He stored the cookies in his garage, bought a truck to deliver them and took a delivery from Pepperidge Farms once a week. He had to open accounts with stores who didn’t already deal with Pepperidge Farm. The store would have to take a full rack of all varieties and once a week he’d go in pull the expired cookies and replace depleted stock. Expired cookies got trashed or eaten at home.
To buy into this franchise the man had to borrow money from several members of his family, but after about 15 years he was able to sell off half his city-wide route for more than he paid for the whole city. Thirty years later he sold off half of what he kept for twice what he paid for the whole city.
He basically kept the parts of the city near his home base area. By now he no longer did the stocking himself, instead he was paying two people to do the deliveries and all he did was the bookkeeping and ordering. He rented a storage area to keep the cookies, instead of using his home as he had done in the beginning.
He more than paid back his investor relatives who simply loaned him the money (instead of being partners) and his $150,000 investment allowed him to move from a modest single family home down in the suburbs up to a view home on the hill worth more than half a million dollars. He started the franchise route when he was in his 20's and sold completely out retiring in his 50’s with a net worth of just under a million dollars.
Now, had those cookies failed in the market place he would have been out his investment.
We talked with another family who bought into a House of Pies franchise in the late 1960’s. While this sit-down restaurant catered mostly to deserts the did offer some sandwiches and microwave hot dishes. On weekends they were quite busy, but on off days it was not always that profitable. After three or so years many of the franchised outlets closed down going totally under or selling back to the Corporation. Eventually the whole company closed it doors.
While the product was good and they did pack in the people on some days, it was not a totally profitable product. Perhaps if they just sold the pies like a bakery their overhead and insurance would have been lessened and a more profitable structure been achieved.
In Los Angeles there was once an attempt to market the Roy Rogers Roast Beef franchise, but it didn’t hold the amount of name recognition in that area that it held in a place like New York state. It also had to compete with a heavily established Arby’s Roast Beef. After a year the franchises were converted to Bob’s Junior, as this was part of the Bob’s/Marriott franchise of restaurants that included Coco’s and Bob’s Big Boy. After a while the Bob’s Juniors eventually closed their doors.
Buying a franchise from a major company, such as this one, is no warranty that you will succeed. You and the parent company both face going under in the immediate area. While the parent company may survive financially there is no warranty that you will!
Franchises are iffy. Even one from McDonald’s doesn't mean you will become rich. It might be the wrong area, the wrong clientele, with too many Wendy’s and Burger King’s near your location.
Be ready to struggle the first few years, only after you build a niche will you franchise be profitable enough for a resale at higher than what you paid. The parent company will also have a say in how and to whom you can sell the franchise.