Should you buy an existing franchise?

(upbeat music) - [Jim] Hi, this is Jim and I'm from Los Angeles, California. I'm a long time listener of the show. I'm looking for something that is proven and established. I'm wondering if I should consider opening a franchise store. There's a Subway sandwich shop on every corner, and a Cold Stone Creamery in every shopping center. This just feels safer than trying to start my own thing, but maybe I'm missing something. What are the advantages and disadvantages of going this route? I look forward to hearing from you, and thank you for taking my question. - So here's a fun fact, when I was 17, one of my entrepreneurial dreams was to open a Mailboxes Et cetera franchise. I actually used my AOL email address to go out and survey the owners of Mailboxes Et cetera franchises that I had found online. In other words I had looked up contact info for several franchisees. So I wrote to them and I asked all kinds of cheeky questions like how much money do they make from their franchise? Now it's funny how things come full circle because these days I'm doing all these case studies and talking to people about how much money they make from their business. But before I did that, I grew up and did other things, realizing first of all that I didn't have the capital, also known as money, to buy my own Mailbox Et cetera franchise, and then I also found something that was better. Still, just like Jim says there are franchises everywhere, might there be a good reason to buy into one? Well sure there might be, and Jim points to the ubiquity of the name, everybody knows what these kinds of businesses are, you don't have to worry about branding and so on, but there are also some pretty good reasons not to. So let's look first at the costs, Subway is one of the cheapest major fast food restaurants to franchise. Their fee for just becoming a franchisee is $15,000. And a typical startup costs, which include construction and equipment leasing range from 105,000 to $393,000 according to the company. Now of course that's a big range, but still, 100,000 to almost $400,000 dollars, how about a Cold Stone Creamery franchise? Well there again a big range, 53,000 to $468,000. McDonald's estimates that their average total startup investment for a franchisee ranges from one to two million dollars. Now the franchise fee is just one initial cost of many, you also have to pay ongoing fees, usually in the form of a percentage of sales to the franchise overlords. Then you're required to operate this business in a really specific way, typically with hundreds of pages of documentation that you're required to follow to remain in compliance. So there's a lot of negatives, it's a very systemized business, you're buying into someone else's system, you follow the system and the protocol very precisely, and you might get, you know, an average return from it. But it's definitely very different from starting your own thing. Also one thing I remember hearing way back when I did my unconventional AOL email survey of Mailboxes et cetera franchise owners is that you don't really start making money until you have multiple locations, which obviously require years of experience and of course more capital. That's why I think unless you have a really good reason why opening that Cold Stone Creamery or Subway is compelling to you, you can probably do better elsewhere. Lastly, sometimes people say well I'm not very creative, I don't have any ideas, so I would rather just kind of follow one of these existing models. My response is everyone is creative, first of all, and if nothing else there are more than 1,000 ideas in the side hustle school archives. In all of these case studies, these small business tips, everything else, you're more than welcome to steal one of those ideas and save your $40,000 franchise fee. (upbeat music)