How to Buy a Franchise
Buying a franchise business is an exciting endeavor. Unlike starting a business from scratch, franchising is a business model where independent entrepreneurs (the franchisee) buy into an existing business. It's a form of business expansion where the franchisor maintains control over the brand name, but provides support and guidance to help franchisees succeed.
Prospective franchisees have two primary options:
- Buy an Existing Franchise: You can purchase an existing franchise unit from a current franchisee. Franchise resales offer the advantage of acquiring a business with an established customer base, operational processes, and revenue stream.
- Start a New Franchise Unit: Prospective franchisees can open a new business unit and have control over the business’s location, design, and initial setup.
Is a Franchise Right for You?
Deciding whether buying a franchise is right for you involves careful consideration:
- Franchise vs. Established Business: Franchises offer an established brand and support, but come with strict guidelines. Buying an established business that isn’t a franchise offers autonomy, but can take more work to build brand recognition and a positive reputation.
- Investment: Franchises require upfront fees and ongoing royalties. Independent ventures may have a lower initial investment, but entail greater financial risk.
- Goals for Entrepreneurship: Franchises are suitable for those seeking a proven model with a built-in support system. Independent businesses appeal to individuals who want creative freedom and full control over operations and branding.
How to Research Franchises
Becoming a business owner starts with conducting due diligence. Startups and small businesses need a business plan to be successful, so take your time. Consider the following steps as part of your independent research into business ownership, and connect with an expert broker or consultant when you need a second opinion.
Review Initial Fees/Ongoing Costs
Research the franchise fees, royalty fees, and advertising fees. Check associated costs, such as equipment, inventory, and lease expenses to gauge the total investment required.
Learn About Franchisor Controls
Examine the level of control the franchisor maintains. Investigate their involvement in site selection (if necessary) and approval processes. Review the brand’s design standards and territorial restrictions to understand the extent of autonomy as a franchisee.
Review Contracts and Agreements
Carefully review franchise agreements, paying close attention to the initial franchise fee, termination clauses, and renewal terms. When examining the Franchise Disclosure Document (FDD), focus on key sections such as Item 17 (Renewal, Termination, Transfer) and Item 19 (Financial Performance Representations), if provided. Look for any restrictions or obligations related to contract terminations and understand the franchisor's policies regarding the transfer of franchise ownership. Evaluate the franchisor's track record of franchise terminations and renewals.
Additionally, seek clarification on any ambiguous language and consult with a franchise attorney or legal advisor to ensure you thoroughly understand your rights and obligations as a potential franchisee.
Explore Types of Franchises
Many franchise options are available, including single-unit, multi-unit, or area development businesses. Evaluate each type based on your investment capacity, goals, and preferences. As you explore the options, consider various factors to determine the best fit for your venture:
- Qualifications (Net Worth, Liquid Capital): Determine your financial capacity by assessing your net worth and liquid capital. Ensure you meet the franchisor's financial requirements for investment and operational expenses.
- Choose a franchise industry: Research different types of businesses to identify sectors aligned with your interests, skill set, and market trends. It’s going to be your own business, so make sure you love the industry.
- Location: Evaluate potential locations based on demographics, competition, and market demand to ensure viability and profitability.
- Costs: Assess initial investment requirements, startup costs, ongoing fees, and potential return on investment to determine affordability and financial feasibility.
- Talk to Franchisees: Take the opportunity to learn from current franchisees. Gain firsthand knowledge of their experiences, challenges, and satisfaction with the franchise system.
Using a Franchise Consultant/Broker
When researching successful franchises, consider enlisting the expertise of a franchise consultant or broker to guide your decision-making process:
A franchise consultant provides strategic advice and assistance throughout the franchise exploration and acquisition. They offer insights into various franchise options, help assess your skills and goals, and provide personalized recommendations tailored to your needs. Consultants typically charge a fee, but can offer valuable expertise and support.
A franchise broker acts as an intermediary between prospective franchisees and franchisors. They match individuals with suitable franchise opportunities based on their preferences, qualifications, and financial capacity. Brokers often have access to many business opportunities and may receive commissions from franchisors for successful matches.
The Final Stages of Choosing a Franchise
As you approach the final stages of selecting the right franchise, take the following steps to ensure you’re making an informed (and thorough) decision:
- Evaluate earning potential. Review the franchisor's financial statements (if provided in Item 19 of the FDD). You can also conduct additional research to estimate potential earnings based on industry benchmarks and franchisee testimonials.
- Review the franchise agreement. Sit down with your legal advisors to review the franchise agreement. Make sure you understand all terms, obligations, and restrictions. Negotiate terms where possible and don’t hesitate to seek clarification on any ambiguities.
- Learn about training. Ensure you understand the level of training and support that the franchisor will be providing, including initial training programs and ongoing assistance.
- Secure financing. Lock in the investment you need to make your franchise dream a reality. Whether you’re funding this venture through personal savings, loans, or other lender sources, be sure you work with financial advisors if you have any questions about the affordability and viability of your investment.
- Narrow down potential franchise locations (if starting with a new franchise). While the franchisor may have the final say in real estate, do your research to choose suitable locations for your franchise. Remember to consider demographics, competition, and market demand. You can bring this information to the franchisor and make a case for the location you like best.
- Participate in a Discovery Day. Many franchisors will host a “discovery day” or similar event to meet key team members. This is a great chance to ask questions and gain further insights into the franchise system and culture.
Find the ideal franchise for you by searching through hundreds of options for sale in the BizBuySell Franchise Directory. Simply request free information when you find an opportunity that you're interested in.