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Buying A Franchise As an Additional Income Stream




Over 99% of the businesses within American are classified as small businesses. Small businesses afford owners not just the opportunity for financial gains, but to be their own boss, to set their own hours, be creative, and to serve their communities. Entrepreneurship is a spirit we love to instill within our Physician Side Gigs community.


Starting a business, however, is hard work, which is why the vast majority fail. Here are some sobering statistics:

  • 20% of small businesses fail within the first year

  • 30% fail in year two

  • 50% fail in the first five years

  • 70% fail in the first decade

We don't share these stats to scare you, but to make you better prepared for the journey ahead to help you become part of the successful percent.


Start-ups face various challenges such as product creation, marketing plan development, and branding (see our post on scaling your side gig). Franchising an existing business model can be at attractive alternative that cuts down on a lot of the overwhelming steps of starting a new business.


Disclaimer: This page contains information about our sponsors, as well as affiliate links, which support the group at no cost to you. These should be viewed as introductions rather than formal recommendations - please do your own due diligence before making decisions based on this page. We are not formal financial, legal, or otherwise licensed professionals, and you should consult these as appropriate.


Quick Links

Resources


Attorney Database: If you need an attorney to help you with any contracts for your franchise or any of the financial structuring of your franchise, check out our attorney database.


Financial Planners: If you want a fee-only advisor to help you assess your current financial standing as well as evaluate your capacity for a franchise buy-in, we have a list of financial planners for you to explore.



Franchising Opportunities


A franchise is typically a business agreement between your business and a chain corporation that allows you to take advantage of the work they've put into building a successful brand and business model ("business format franchising") by licensing these things. As consumers, while so many of us love supporting small businesses, we all know there's a certain comfort in going with the tried and true. We've likely all been guilty of stopping at a chain restaurant on our road trips even though there's great food to be had locally because we want our reliable favorites.


When thinking of franchises, there are so many different industries that likely come to mind, including restaurants, grocery stores, and hotel chains. Some more examples include:

  • Fast food chains such as donut shops, sandwich shops, and

  • Gas stations

  • Supplemental education (think of popular tutoring companies)

  • Professional tools and equipment

  • Car maintenance

  • Fitness centers

  • Mail/delivery services

  • Home repair and remodeling

  • Furniture stores

  • Residential and commercial cleaning services

  • Hair salons

Franchising exists even in healthcare If you desire to align your franchising side gig with your clinical career. Several home health care agencies, transport services, massage centers, med spas, and urgent cares offer franchising opportunities.


Top franchises of 2023

While restaurants feature heavily in the top franchise ranking, don't let that limit you. We believe strongly that the more you align with your side gig, the higher your change of success.


These are only a few of your options. If you're interested in a franchise but don't know what type you want to own, do your research. The popularity of franchising means there are a wealth of websites dedicated to education and information. The International Franchise Association (IFA) is regarded as the leading industry association for franchises and offers guides, webinars, and events to help you explore franchising.


Just because you've seen a store in multiple locations doesn't necessarily mean it is a franchise. Depending on the parent brand's business model, franchising opportunities can be rampant or extremely limited. Some chains don't franchise at all, and all operations are overseen by the parent company. Others, like many hotel chains, often are locally run, but can have very expensive upfront and ongoing fees. On the flip side, many smaller parent companies don't have the bandwidth or financing to scale themselves, and are actively seeking out others to help grow their brand. Those franchising fees can be quite minimal, as you may be bringing just as much value to them as they are to you. You may even consider approaching a successful small business and seeing if they want to consider franchising!



The Pros and Cons of Franchising


The trade-off of franchising comes from the ongoing relationship with the franchisor. For the right to use their branding, trademarks, products, training, and business model, you agree to give them a cut of your profits, often for as long as you remain in business, and stay consistent with the standards set by their brand. Below, we'll look at some benefits of owning a franchise, as well as the opportunity costs. Depending on how popular the chain is, franchising fees can be quite significant. There's often an upfront franchising fee and then ongoing monthly franchising fees, which we'll get into more below.


Pros and cons of owning a franchise as a side gig

Pros

  1. Established Brand: The risk of not finding product-market fit is lower when you latch onto a successful business model that already has an established brand name and reputation. In many cases, if you're in a locale where the franchise doesn't exist, but you know it's popular elsewhere, you can follow the "if you build it, they will come" philosophy.

  2. Materials: Anyone who's tried to build a business knows how many logistics have to be addressed at the get go. Chances are, this is all operationalized with a franchise. You'll be given marketing materials, they'll help you set up the business, they'll provide you with software, hiring and training guides, etc.

  3. Support: Franchises are vested in making sure their brand doesn't suffer, so they usually offer a lot of training and resources to make sure that you are successful. There is likely always someone you can call whose job it is to help you. Chances are, other franchisees have had similar issues, and they already have a playbook to address whatever issue you're having.

  4. Fun/camaraderie/motivation: Many of us like to feel like we're a part of something bigger. Franchises want to make sure you stay loyal to the brand and are a good advocate for it. Many will host events for franchise owners or have prizes for the branch that sells the most, etc. As we believe with Physician Side Gigs and Physician Community, going through an experience with others as always more fun. You'll also have other people who get it when times are tough and can offer support and advice.

Cons

  1. Higher Costs: While you get the benefit of their network of vendors and supply chains, it doesn't always mean you're getting a deal. These resources come at a cost, both on the front end as a franchising fee, which requires extra start-up capital, and continually as ongoing royalties and advertising fees. Royalty fees of 5%-8% are common to see. Advertising fees can run another 1%-3%, which can cut significantly into your profits, especially in the early years. This will feel like another mortgage payment every month. In a DIY model, you don't have to worry about standing payments to someone else.

  2. Limited Flexibility: The trade-off for using their proven business model is that it restricts you to that model within the terms of your franchising agreement. While the support is nice to help get started, you might find it limiting later on as you look to expand avenues of profit or to create work life balance for yourself. If you own a gas station, for example, company policy may dictate the hours your operation has to be open and which brands have to be offered in the mini-mart. Other company policies may include staffing ratios, what ancillary revenue streams you can create, or what promotions you can run. A lot of our creative entrepreneurs might find the franchising model too restrictive in the long run.

  3. Additional Risks and Challenges: As a franchisee, you are tied to the national or international franchise name. If they face financial or legal challenges, or a reputation issue, all of that will likely affect your business. Since your expenses are greater with the fixed fees and upfront franchising fees, you also have to generate more proof to stay afloat. You may also find yourself prone to legal action if something you do is not consistent with their policies or harms their reputation in some way.

The Costs of Running a Franchise

Startup costs:

We mentioned above the initial franchise fees and ongoing royalties. The initial franchise fee is only part of the start-up cost. Many times, websites will have franchising pages that break down the estimated expenses, and you should read these carefully as they add up quickly, and if you're getting financing, the loan officer will be quick to point out additional requirements. These include training expenses, commercial real estate down payment or if leasing, security deposits, outfitting your space with tenant improvements and furniture, equipment costs, basic systems such as information systems and security, marketing dollars, legal and accounting costs, licensing costs, insurance, and required cash reserves. Some franchises even have a net worth requirement - Taco Bell, for example, required 1.5 million in assets in 2020.


Unfortunately, some ranges provided on the website can vary significantly (like by millions of dollars!) depending on things like location. Depending on the industry, inventory, furniture, rent, hiring costs are huge variables. See our chart above for examples of the top ten franchising and their estimated start-up costs.

Ongoing costs:

Like all businesses, franchises will have ongoing costs in addition to the ongoing franchising fees as well. These include monthly rent or mortgage payments, insurance payments, business licenses, legal and accounting costs, utilities, employee costs such as benefits programs, etc. Most franchises will be able to help you project what these costs will be, and these are often also included on their websites.


When evaluating different franchises, it's important to keep these numbers in mind. If you notice above, the estimate doesn't include the cost of labor. For many service-related industries (popular in franchising as mentioned above), labor is one of the largest line items on your business's profit-and-loss statement. So make sure you have a solid understand of the industry you're entering and extra cash reserves, especially in the beginning.


Deciding on a Franchise


As you search through the hundreds of different franchising opportunities across dozens of industries, here are some steps to consider and prepare for as you decide to start your first franchise.


1. Do your research.

Make sure you know what your goal is for your franchise and what type of business you actually want to run. Even with a trustworthy management partner, you need to understand and monitor your investment. Once you know what type of franchise you want to run, make sure you evaluate it properly for factors such as market demand, competition, franchise rules and restrictions, and start-up costs.


2. Understand your future franchise.

Before you sign on the dotted line, make sure you understand the business model of the franchise you plan to buy into. During conversations with the franchisor, make sure you get a full list and clear understanding of their guiding rules. Before spending hundreds of thousands of dollars, you want to make sure you know what you're getting into and, more importantly, feel comfortable running your business under their model. Searching websites like the Franchise Business Review can help you learn from other franchisees what to expect before you dive in.


3. Have your documents ready.

Not only do you want to make sure you have an accurate understanding of your net worth to determine your budget for your franchise, but the franchisor will probably have net worth and credit score requirements. Some also require proof of personal qualifications, such as industry and/or management experience.


Just because you want to partner with a specific franchisor doesn't mean you will get the opportunity. There is a formal application process, so making sure you're prepared ahead of time will further your odds of success.


The franchisor should send your their financial document, the Franchise Disclosure Document (FDD), during discussions. This document includes their financial information, including their on-going royalty fees. Review this well to ensure your finances and plan for your business align with their vision for their franchises. Selling or transferring a franchise can be complex, so you want to make sure it's a sound business partnership from the start.


4. Finalize your financial plan before finalizing the deal.

During your discussions with the franchisor and your review of their FDD, you should get a good idea of what financial obligations the franchise will require. Pull together a secure financial plan to make sure you'll be able to run the franchise instead of it running you. For a primer on self-employed and side business finances, check out our page here. We also have a database of attorneys we have partnered with if you need help during the process. Along with your financial plan, make sure you have a detailed business plan outlining your goals and operational plans, making sure that they align with the regulations the franchisor has set forth.


As part of your planning, it's good to do a preliminary search of potential locations for your future franchise so you have a good understanding of what rent, insurances, utilities, etc. will cost. You want to make sure you can find a desirable location (high foot traffic and visibility, etc.) that gives your business plan the opportunity to succeed before finalizing your deal with the franchisor. See our Choosing the Location section of our Private Practice page for some ideas on factors to consider.


Once you have a plan in place, make sure you can acquire the start-up capital if you don't have it all available in cash you want to use. See the Resources section above for business financing options.



Conclusion


For busy physicians who want to own their own business outside of a private practice, franchising can be a great opportunity. With proper planning and management in place, a franchise can become a potential source of passive income to help diversify your assets. But unlike investing, a franchise isn't passive income from the start. It takes a lot of upfront time to get it up and running to where you can step away, if ever. You will always want to have a strong relationship with your management team, as well as some sort of oversight long-term to ensure your investment continues to grow and produce dividends, just like your retirement accounts. Also remember that no matter how much you outsource, all liability will ultimately fall to the owner, so it would not be wise to be completely passive. A franchise is like any other business - a commitment that comes with huge opportunity, but has costs associated with it.


If you've reviewed the above and don't think franchises are the best side gig for you, explore our side gigs page for other options and ideas.



References


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