Should You Buy A Franchise? A Guide to What It Takes
Owning and operating a business is a huge milestone that many people work years to achieve. They save every last cent, conduct countless hours of research, and when it's finally time to take the plunge into buying a business, they exert even more time and effort into that endeavor.
But all of this effort may be for naught, because half of all new businesses fail within the first 5 years.
More and more, people have been moving away from starting a new business from scratch to instead buying a franchise of an existing business. Franchising has been a common business practice for generations and, currently, 4% of all small businesses are franchises.
Many people still aren't clear on the process of owning a franchise. If you've ever considered business ownership and asked yourself, “Should I buy a franchise?” this guide is for you. In it, you'll learn the in's and out's of how to buy a franchise, the pros and cons of franchise ownership, the costs behind buying and opening a franchise, and more. Let's get started.
The Difference Between Franchising and Other Business Ownership
Owning a business, no matter if it's a franchise or another type of company, comes with its own set of peaks and valleys. For instance, if you open a business outright, you have full control over the branding, messaging, product, and direction of the company. You are able to make all of the decisions, which is why owning a business traditionally is the way many people go. But, owning a business opens you up to a lot more negative impacts.
These negative impacts are one of the reasons why people want to buy a franchise. Though there are still cons to owning a franchise, there are many unique benefits that go along with this type of business venture. Some benefits to owning a franchise include:
- Having the ability to know your business is going to succeed - With a franchise, you have the backing of a company with an established business model that is prepared for growth and fiscal prosperity.
- Getting ample support from the parent business at every stage of your franchise - Because you are under the umbrella of a parent business, they can give you ample amounts of advice, deliver insider tips, and contribute an informed support system to your franchise for the life of your franchise.
- Being able to open up multiple franchises - With franchising, you can own as many or as few businesses as you like - there's no cap on the potential you have with the franchises you open. So, if you see that your first franchise is doing well, you can always opt to start the franchise process again.
- Obtaining brand recognition, building an instance audience - Opening a franchise, especially a well-known one, will immediately bring business to your doorstep. Even if your franchise is attached to a new or relatively unknown brand if even one person in the area has heard of it, you have a leg up. And, when you couple that with a robust marketing strategy, you'll be in great shape.
Again, franchising comes with its own set of pitfalls that anyone looking into buying a franchise needs to consider. The main negatives of franchising are:
- The initial payout of buying a franchise - Franchises cost a lot of money to open. And, when you opt to own a well-known franchise, that often means that you will have to shell out a rather large sum of money very quickly. This amount is often more than what it would cost to start your own business.
- Having to dish out royalty payments - You will be contractually required to pay some percentage of the monthly gross earnings back to your parent company throughout the life of your franchise. This, of course, takes money out of your pocket.
- Having limited to no creative control or flexibility - Most franchising contracts have very explicit terms and standards that allow for little or no alterations or additions to the brand. This can be stifling if you are looking to open a business to flex your creative muscles.
These cons and more are all things you will need to consider if you are looking into owning a franchise.
The Costs that Go into Franchising
We briefly touched on this in the last section, but franchising costs a lot of money upfront and through the life of the franchise. You will need to have a significant amount of capital to back your investment (in many cases, even more than is required to start your business outright). The most common fees associated with buying a franchise are:
- Franchise Fee - Generally, the franchise fee is the upfront licensing fee for the right to use the franchise name. This amount typically around $20,000 to $50,000.
- Legal and Accounting Fees - It's always a good idea to consult with a franchise attorney and accountant when going through the franchise process.
- Available Working Capital - Working capital is the amount of day-by-day cash available to a business. You'll need funds that can help sustain your business from as little as two or three months to as much as two to three years. The franchisor usually denotes how much minimal capital you'll need, but be sure to research your industry for standards.
- Build-Out Costs - Typically you'll need to spend money on building out the franchise's storefront or restaurant. This will vary based on the condition of the real estate (either empty land or an existing building) as well as the set-up of the franchise. Sometimes, franchisors will have specifications or even building templates that franchisees must use.
- Inventory and Supplies Costs - Once you've found a location for your franchise, you will need to physically build it and stock it with the inventory you need. This amount varies widely depending on the industry you are working in.
- Travel Expenses for Training - Even though the franchise fee generally covers the cost of the training courses, you're on your own for travel expenses. These can range from tanks of gas to plane tickets.
The Process of Becoming a Franchise Owner
After you determine what type of industry and franchise you want to pursue, follow the steps below to see your dream become a reality:
Evaluate franchise companies in your area that fit the profile of the type of franchise you're looking for. Weigh those franchises against your own needs. Consider factors like investment amount, local availability, and lifestyle fit before you move to the next step.
- Contact the Franchisor and Submit An Application
Contact the franchisors you're interested in to have their offices send you preliminary information about the franchise and the steps that are involved in purchasing a unit. If you like what you see, submit an application. Many places will require you to provide proof that your partnership will be a good fit, with some companies having an extensive list of requirements you will need to satisfy.
- Review the Franchise Disclosure Document (FDD)
The Franchise Disclosure Document (FDD) is a legal document that defines the relationship between the Franchisee and the Franchisor. The FDD helps you understand the franchise's model, fees, and commitments that are required in the Franchise Agreement.
- Create a Business Plan
At this point, you will need to create a business plan that will lay out your business projections for the coming months and years. Be sure to collaborate with your franchisor and research industry trends to make sure that your numbers are in line with the business.
- Financial and Legal Review
Do you remember the franchise attorney and accountant we mentioned earlier? This is where they come in. It's important to have them review all financial and legal documents to look out for any jargon that they will understand but you will not. If everything looks good, you will then sign the franchise agreement and pay the initial franchise fee.
- Find and Secure a Location for the Franchise
Look at franchisor site requirements and seek out a competitive location and submit to the franchisor to get approval. Once they provide the necessary approval, you can then sign the lease and start developing the location. Be sure to know what the process involvement and design specifications are for your franchise before you begin work - some have specific build and design requirements.
- Franchise Training
As location development is happening, you will be required to attend franchise training to learn the ins and outs of how to run your franchise to the standards as laid out by the business model. For this step, you will typically have to travel to franchise headquarters and training can last anywhere from a few days to a few weeks. Be sure to make the necessary arrangements.
- Preparing for the Grand Opening
Once training is over, you'll be able to finish up the final touches of your location development, which includes finishing the build-out, making sure everything is equipped to operate, and hiring and training your staff. At the end of it all, you will be ready to open your doors for the very first time.
So, is Franchising the Right Choice for You?
After reading all of this information about what goes into franchising, have you decided if it's the right thing for your business future? In order to answer this question effectively, we recommend that you ask yourself even more questions. This is the process where you will need to do some soul searching to figure out if this is really the career and lifestyle you'll want. Consider the following questions:
- Is franchising the right type of business ownership for you?
- Do you have the experience that franchisors require?
- Do you have the capital to cover the upfront costs?
- Does your lifestyle match up with that of a franchisor?
- Do you have the flexibility to go to trainings and meetings with a franchisor?
- How much money can I comfortably borrow to invest in a franchise?
- Do I have enough saved that I could live for a year with zero income?
Take your time when you're answering these questions and thoroughly evaluate what you are looking for out of your career and future before you begin to answer them. Be sure to do your due diligence and conduct research into the industry and type of business you want to pursue.
Owning a franchise is a wonderful way to start your journey as a business owner. Though there are many things to consider before undergoing the franchise-buying process, many people find that becoming a franchisee has led to great success. When you're ready to start your own franchise, don't hesitate to visit FranchiseOpportunities.com to learn more.
About Franchise Opportunities
Franchise Opportunities offers a variety of franchises and business opportunities for sale. You can browse the available franchises by location, investment level, industry, and more, in order to find the one that is the perfect fit for you.
Read more about this in our complete guide on How To Buy A Franchise.