Franchisees Pay a Premium to Buy Into Large Chains

For would-be franchisees who can’t afford the biggest chains, there are plenty of smaller outlets. Their names may sound a little hokey (P.B. Loco Peanutbutterlicious Café; Lil’ Pals Pet Photography), and the business models may be shakier. Unproven franchises are inherently riskier than established national brands, although big chains can also struggle.

Businessweek
November 5, 2014

Franchisees Pay a Premium to Buy Into Large Chains
Patrick Clark

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Photograph by Hisham Ibrahim/Getty Images

McDonald’s (MCD) has more than 14,000 franchises in the U.S., while 7-Eleven has 7,800. Those are the types of businesses most people think of when they think about franchises, which helps explain why entrepreneurs buying into those chains pay a premium: The median costs for opening a franchise in the largest U.S. systems is more than double what franchisees can pay to invest in a smaller chain.

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The numbers are compiled by a Canadian company called FranchiseGrade, which gathered the data from 1,880 franchise disclosure forms, and it’s likely that some smaller chains have slipped through the cracks. (We look at median data because franchised hotel chains, which have higher startup costs, can skew averages.)

Large chains have better name recognition than smaller ones, so it’s not surprising that they can charge a premium. Large chains are also more likely to attract multi-unit franchise owners, such as the publicly traded Carrols Restaurant Group (TAST), which owns more than 500 Burger Kings. Higher startup costs—which can include license fees, equipment, and other supplies—may also help the big chains weed out less sophisticated entrepreneurs.

For would-be franchisees who can’t afford the biggest chains, there are plenty of smaller outlets. Their names may sound a little hokey (P.B. Loco Peanutbutterlicious Café; Lil’ Pals Pet Photography), and the business models may be shakier. Unproven franchises are inherently riskier than established national brands, although big chains can also struggle.

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The data should help potential franchise buyers differentiate between the types of opportunities in front of them. Most companies selling franchises have only a small number of locations. The ones with the biggest footprints cost the most.

Clark is a reporter for Bloomberg Businessweek covering small business and entrepreneurship.

http://www.businessweek.com/articles/2014-11-05/franchising-franchisees-pay-a-premium-to-buy-into-large-chains


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