Buying a franchise can be an attractive option for aspiring business owners, offering the ability to capitalize on an established brand while still enjoying the perks of independent ownership. Franchising is a business model where one company (the franchisor) licenses its brand, products, services, and business operations system to an operator (the franchisee) in exchange for an ongoing fee.
There are over 780,000 franchise establishments in the United States employing more than 8.5 million Americans according to recent data.
The franchising model offers some key advantages for franchisees. By purchasing a franchise, you can leverage the brand recognition, supply chain relationships, and established systems of an existing business.
This can reduce risk, make it easier to obtain financing and increase the chances of success compared to starting a completely independent business. Franchising also provides extensive training and support from the franchisor to help franchisees learn how to operate the business.
However, there are also some potential downsides of franchising to consider. As a franchisee, you will have to pay an upfront franchise fee and royalties on an ongoing basis. You will also be required to strictly follow the franchisor’s system and operating procedures, with limited ability to make independent business decisions.
There may be territorial restrictions limiting your potential customer base. It’s important to thoroughly research any franchise brand before purchasing to understand the benefits and drawbacks of that model.
Overall, franchising can provide aspiring entrepreneurs a quicker path to business ownership along with valuable systems and support. But it does require an initial investment, ongoing fees, and operating within someone else’s business system.
Weighing the pros and cons of the franchising model compared to starting an independent business is an important first step when considering franchising.
Choosing a Franchise Category
Choosing the right franchise category that matches your interests, skills, and goals is one of the most important decisions when becoming a franchise owner. There are over 300 franchise categories ranging from food service and retail to business services and personal care.
Analyzing the various franchise categories and industries will help you determine where you would thrive as a franchisee.
Consider exploring categories like:
- Food and Beverage: This includes popular franchises like fast food, coffee shops, ice cream & yogurt, and full-service restaurants. It allows you to capitalize on America’s love for dining out.
- Retail: This covers stores selling apparel & accessories, automotive products, children’s goods, electronics, health & beauty, home furnishings, and more. Retail franchises let you own a local store in a major retail chain.
- Lodging: Hotel and motel franchises provide essential services for travelers and offer opportunities for investors. Brands can include economy budget chains, extended-stay hotels, and boutique luxury properties.
- Business Services: This diverse category ranges from sign shops and shipping stores to tax prep services and staffing agencies. It offers recession-resilient franchise concepts.
- Personal Services: Spas, salons, fitness centers, home repair services, pet care, and educational franchises fall under this category. It allows you to own a business that caters to people’s regular needs.
Take an introspective look at your interests, skills, work experience, and lifestyle to determine if there is a franchise category that stands out as a good fit.
If you’ve always had a passion for food, exploring a culinary franchise like pizza or frozen yogurt could be rewarding. If you excel in sales, a retail franchise may capitalize on your strengths.
Think about the types of products and services you would feel most enthusiastic about offering as a business owner. Once you’ve found a promising category, dive deeper into research to find the best specific franchise opportunity. The right category match can set you up for franchise success.
Researching Franchise Opportunities
Once you’ve narrowed down the type of franchise you’re interested in, it’s time to start researching specific franchise opportunities. There are several ways to find and evaluate potential franchises:
- Online Franchise Directories – Access websites that allow you to search for franchises by category, investment level, location, and other criteria. Browse franchises within your chosen sector to start generating options.
- Evaluate Financial Stability – Thoroughly research the financial viability of any franchise you are considering. Review their franchise disclosure document (FDD) to assess costs, fees, and profitability stats of existing units. Also, request their audited financial statements.
- Understand All Fees – In addition to the franchise fee, make sure you understand ongoing royalty fees, marketing fees, renewal fees, and any other costs involved. Get clarity on all ongoing financial obligations.
- Read the Franchise Disclosure Document (FDD) – The FDD provides details on litigation history, bankruptcy filings, franchisee turnover rates, estimated startup costs, and other vital information. Review it carefully.
- Contact Existing Franchisees – Speaking with current franchisees is one of the best ways to perform due diligence. Ask about their experience with training, ongoing support, technology, and overall profitability. Get the inside scoop.
- Seek Expert Guidance – Consider hiring a franchise lawyer and accountant to help review contracts and provide advice during your research process. Their input could save you from costly mistakes.
Performing in-depth research is critical for finding the right franchise opportunity that aligns with your goals, abilities, and resources. Take time to thoroughly evaluate all options before committing to a long-term franchise investment.
Evaluating the Franchisor
Thoroughly researching the franchisor is a critical step before investing in a franchise. You’ll be joining a system and relying on ongoing support, so it’s important to vet the franchise company.
Company History and Leadership
Look at how long the company has been in business and its growth trajectory. A lengthy, stable history with steady growth is a positive sign.
Research the background of top executives and their franchise experience. Seasoned leadership with franchise expertise provides confidence in the system.
Training and Support Systems
The quality of initial training and ongoing support is crucial. Evaluate the training program for new franchisees as well as continuing education.
Look for a structured curriculum and hands-on instruction. Understand the field support system and how responsive the franchisor is in answering questions and resolving issues. Prioritize systems with robust training.
Current and former franchisees provide helpful insights into the franchisor. Contact franchisees to understand their experience and satisfaction.
Ask about the initial process, training, ongoing support, and their overall recommendation. Happy franchisees demonstrate a collaborative franchisor relationship.
Litigation and Disputes
Research any lawsuits filed by franchisees and disputes with the FTC. A franchisor with multiple disputes could signal potential conflicts.
Some disputes are inevitable, so consider the context and resolution. However, consistent issues could highlight an antagonistic franchisor. Review dispute history objectively.
Thorough vetting provides the information needed to evaluate alignment with a franchisor. Analyze the leadership, support structure, franchisee relationships, and disputes to determine if the opportunity is right for you.
Understanding Franchise Agreements
The franchise agreement is one of the most important documents you’ll sign when becoming a franchisee. This lengthy and complex legal contract governs nearly every aspect of your franchise operation.
Take time to carefully review this agreement and understand how it protects both you and the franchisor.
Key areas to understand in the franchise agreement:
- Length of Term: Franchise agreements generally range from 5 to 20 years. Shorter terms give you flexibility, while longer terms show commitment from both parties. Ensure the term length aligns with your goals.
- Territory: Your territory defines where you can locate units and exclusively sell products/services. Non-exclusive territories provide less protection. Evaluate population, demographics, competition, and growth potential.
- Fees: Understand all initial fees, royalties, marketing contributions, renewals, and transfers. Fees can range from 3% to 12% of gross sales. Evaluate if fees are competitive and affordable.
- Restrictions: Franchisors control their sources of supply, design standards, and operational procedures. Review carefully to avoid potential conflicts. Negotiate terms when possible.
- Franchisee Obligations: You’re obligated to comply with training, reporting, operational manuals, and more. Failure can lead to default. Review obligations thoroughly.
- Renewal Terms: Franchisors can decline renewal for underperformance. Negotiate terms for succession planning. Add a right of first refusal clause for selling if not renewing.
Consult an attorney experienced in franchise agreements. They can help explain terms and negotiate more favorable provisions. The franchise agreement protects the franchisor’s brand but also ensures franchisees operate under clear guidelines and support.
Choosing a Franchise Location
Choosing the right location is one of the most important decisions a franchisee makes. A good location can spell success, while a poor location can lead to failure.
When evaluating potential sites, here are some key factors to consider:
- Market Analysis: Thoroughly research the demographics, psychographics, and competitive landscape around potential locations. Population size, density, age, income levels, and growth projections are critical. But also look at the lifestyle, values, interests, and shopping patterns of the target market. This will help determine if there is sufficient demand for your business.
- Site Visits: There is no substitute for visiting potential sites in person. Look at traffic patterns, visibility, accessibility, parking, and neighborhood feel and safety. Also check out the competition, not just direct competitors but all businesses vying for local spending. Gauge how busy nearby businesses appear to be.
- Demographics: The ideal site will have a large number of people in your target demographic living or working within a 3-5 mile radius. Look at population density, age, income levels, and projections for growth. Find areas aligned with your brand that have the demographics to support sales volumes.
- Competition: Research competitive businesses in the vicinity through observation, data collection, and interviews. Assess the number, size, and strengths of competitors. But also look for gaps or consumer needs not being met locally. The ideal location fills a consumer demand not already saturated.
- Accessibility: Convenience and easy access are key. Being located on a main thoroughfare or traffic artery, and proximity to public transportation, highways, and residential areas are ideal. There should be ample parking spaces on-site or nearby street parking.
- Costs: Carefully evaluate the site costs including rent, utilities, permits, and build-out expenses. Project sales potential and traffic to ensure the location can achieve profitability after costs. Seek negotiating leverage such as signing bonuses to control initial outlay.
With rigorous location analysis, you can find the ideal spot for your franchise that aligns with the brand, targets your audience, meets their needs, and sets up your business for success.
Financing a Franchise
For many potential franchisees, obtaining financing is one of the biggest hurdles to owning a franchise. Franchises require a significant upfront investment, including the franchise fee, equipment, inventory, marketing costs, training expenses, and working capital.
Fortunately, there are several options to finance a franchise purchase:
The Small Business Administration guarantees loans made by banks and other lenders to small businesses through its 7(a) and 504 loan programs. An SBA-guaranteed loan provides the credibility needed to secure financing from traditional lenders.
Franchisees can use SBA loans for franchise fees, equipment, inventory, working capital, and refinancing business debt.
Rollovers for Business Startups
A Rollover for Business Startups allows you to use funds from a retirement account like a 401(k) or IRA to start a franchise, without early withdrawal penalties. You can invest up to $50,000 from an individual retirement account or $100,000 from a 401(k) into starting a franchise business without owing tax on the distributions.
Crowdfunding platforms like Kickstarter and Indiegogo allow entrepreneurs to raise small investments from a large number of people. It’s a way to validate and market your franchise concept while also generating startup capital.
Many franchises got their start on crowdfunding sites.
Franchise Financing Programs
Many franchisors offer direct financing programs to help franchisees with the initial investment. Franchise financing programs provide part of the required funding directly from the franchisor.
This eliminates the need to find outside funding for that portion of the investment. The terms, qualifications, and amounts offered vary by franchisor.
Obtaining financing is a key step in buying a franchise. With preparation and an understanding of the various options available, potential franchisees can secure the funding they need to turn their business ownership dreams into reality.
Preparing for Franchise Ownership
Opening and running any business requires significant preparation, but franchises offer extensive training and support to set franchisees up for success.
Here are key steps to take to prepare for franchise ownership:
Most franchisors provide 2-6 weeks of initial training to teach franchisees the ins and outs of running their business.
This usually takes place at the franchisor’s headquarters and covers operations, management, products/services, marketing, and more. Thoroughly learning the franchisor’s systems is crucial.
In the weeks before opening, franchisees must hire and train staff, stock inventory, set up systems and technology, obtain licenses and insurance, customize branding and marketing, and complete any build-out or renovation work needed.
Franchisors provide checklists and guidance to keep new franchisees on track during this busy period.
Building a strong team is key to a successful launch. Franchisees need to determine their staffing needs, develop hiring and training plans, and leverage the franchisor’s methods for finding, screening, interviewing, hiring, and training employees.
Many franchises have training programs to get new staff up to speed quickly.
With training completed and staff on board, franchisees need to implement the franchisor’s system for all daily operations, including inventory management, production/service delivery, customer service, sales, marketing, administration, finances, and reporting.
Franchisors provide field representatives to advise and assist with the launch.
With extensive franchisor support and adherence to their tried-and-tested system, franchisees can effectively prepare for opening their business. The franchisor’s ongoing guidance helps franchisees continue operating successfully.
Being a Successful Franchisee
Being a successful franchisee requires commitment and hard work. One of the biggest keys to success is following the franchisor’s system and maintaining its standards.
As a franchisee, you are buying into an established brand, so you must represent it properly by adhering to operational procedures and quality controls. This ensures consistency for customers across all locations.
Managing employees is another critical component of running a successful franchise. You need to hire competent staff, properly train them on systems and procedures, and motivate them to provide excellent customer service.
Having an engaged, productive workforce will keep your location operating smoothly.
Growing your franchise over time through smart business decisions and investments can also lead to success. Look for opportunities to expand within your territory when the timing is right.
Consider adding new products or services that fit your brand and customer base. As you build up your location, you may be able to open additional units and become a multi-unit franchisee.
The most successful franchisees are those who can consistently execute the franchise system, manage their teams effectively, and strategically expand their business.
By leveraging the franchise model, you gain access to proven methods and trademarks that should give you an advantage in your local market. But you still need to combine that with your entrepreneurial skills in leadership, marketing, finance, and operations to achieve long-term prosperity and satisfaction as a franchisee.
Exiting the Franchise
As a franchise owner, you’ll eventually reach a point where you are ready to exit the business, whether through selling your franchise, letting your franchise agreement expire, or leaving the franchise system entirely. Planning your exit strategy from the beginning can set you up for success when you decide to move on.
Selling Your Franchise
For many franchisees, the eventual goal is to sell their business for a profit. Franchises with strong brand recognition and a history of good financial performance tend to sell for higher valuations.
As a franchise owner, focus on expanding your customer base, improving store sales, and boosting profitability to increase your resale value. Discuss transfer and succession planning with your franchisor to fully understand the policies, fees, and process for selling your franchise.
Franchise Agreement Renewal
Most franchise agreements are for a set term of 5, 10, or 20 years. As your contract expiration approaches, you’ll need to evaluate whether it makes sense to sign a renewal agreement with your franchisor.
Consider your plans, expected ROI from a renewal term, satisfaction with the franchise relationship, and any contractual obligations for renewing before making this big decision. Weigh the costs of renewal fees and potential capital investments needed to refresh your location.
Leaving the Franchise System
Alternatively, you may opt to leave your franchise altogether when your contract term ends. You’ll lose the ability to use the franchisor’s brand name, trademarks, and systems. But you’ll gain more freedom and independence to run your business as you see fit.
If you choose this path, plan your transition carefully to establish your independent brand and retain as much of your customer base as possible. Consider if you can buy out any branding, signs, or other assets from the franchisor as part of your exit.