To Franchise or Not?

There is another thing to think abut when starting a coffee shop.  In my coffee shop business plan package, I talk about franchises and how they may give you an edge.  They have some name recognition (in most cases), but more often than not they are not favorable options.  Of course, make your own decision but as a franchisee, you are pretty much land-locked into the franchisor’s way of doing things.

Some Pros

  • Name recognition, branding etc.  Though in the coffee industry, franchising is still in its infancy. It is not like the fast food franchise industry.  Just look around you and think about that.
  • Most coffee shop franchises are regional and will only be recognized by locals, not that that is a bad thing but you automatically discard any travelers or tourists since they most likely will not know your branding.  Here are a few:  Tim Horton’s, It’s A Grind, Arabica, Cuppy’s, Scooter’s to name a few.  This point is kind of a pro and con both.
  • Better pricing on products because of volume.
  • Better pricing on equipment because of volume.
  • Some support in planning stages like site selection, lease negotiation and build out.
  • Ongoing support in marketing and operations (check the particulars on this in the contract).

Cons

  • Mandated proprietary ingredients, coffee, equipment, etc (usually).  You have less leeway for freedom to use products that you want to use.  If your franchisor uses bad coffee (I know of one in Ohio that is AWFUL!), you are not going to do well in the long run.
  • Up front franchise fee, sometimes as high as $100,000 before you actually start anything.
  • Ongoing royalties paid monthly, usually 3-7% of your GROSS sales.  Suppose you do $30,000 per month; do the math on that one.
  • The franchise agreement is usually a locked in period of time from 5-10 years.
  • Ongoing marketing fees of 3-7% of your monthly GROSS!   Though this is comforting to know someone has your back for marketing, marketing is not this expensive for a specialty coffee retailer.
  • A fairly high personal net worth is usually needed of all owners.  Again, this is something that is not a bad thing, and can actually benefit the business.  They usually look for a personal net worth in the neighborhood of $100,000-500,000, with anywhere between $50,000 -300,000 of that liquid assets depending on the franchisor.  Those are high numbers to achieve for the average new entrepreneur.  However,  just because you have money or high ‘paper’ net worth does not mean you know how to or have what it takes to run a business.  Take the time to learn how to run a business.

So there are a few tidbits about franchising in the coffee business.  I go into more detail in my coffee shop business plan but at least you have something to get you thinking on the best track for your business.  For more information, have a look at my coffee shop buiness plan at http://www.tonys-coffee-shop-business-plan.com Good luck!

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