How To Buy a Franchise

If you want to buy a franchise, be prepared to do your due diligence. Learning everything you need to know requires careful planning and research, but if you follow the right steps, becoming a franchise owner may be easier than expected.

What Is a Franchise?

A franchise is a business arrangement where an individual or entity, known as the franchisee, purchases a license to operate a location for an existing business. The franchisee is required to use the established brand, products, and processes of the franchisor, aiming to replicate its business model and bolster its brand reputation.

Part of the arrangement involves the franchisee paying initial fees and ongoing royalties to the franchisor. The franchisee also contributes to a pool for branding and advertising managed by the franchisor to support all franchise locations.

Key features of a franchise include:

• Brand Licensing: Franchisees use the established brand of the franchisor.
• Operational Systems: Franchisees follow proven processes and systems.
• Financial Commitments: Franchisees pay initial fees and ongoing fees and royalties.
• Collective Advertising: Franchisees contribute to (and benefit from) joint marketing efforts.
• Independence with Support: Franchisees operate independently, but receive ongoing support from the franchisor.

Pros and Cons of Franchising

Pros

• Established Brand Recognition: Franchisees benefit from the established brand awareness of the franchisor and an existing customer base, which can lead to a quicker start and easier market entry.
• Proven Business Model: Franchisors provide a proven and successful business model, reducing the risk of starting a new business from scratch.
• Collective Advertising: Franchisees contribute to collective advertising funds, allowing for more extensive and impactful marketing campaigns.
• Access to Innovation: Franchisees may benefit from the franchisor’s continuous innovation, technologies, and research and development efforts.
• Ongoing Support: Franchisees receive ongoing support from the franchisor, including training, marketing assistance, and operational guidance.

Cons

• High Upfront Costs: Franchisees often face significant initial franchise costs, including fees, royalties, and other startup expenses.
• Lack of Independence: Franchisees must operate within the guidelines set by the franchisor, limiting their independence and creativity in business operations.
• Royalty Payments, Advertising Fees, and Other Franchise Fees: Franchisees must make ongoing payments to the franchisor, which can impact profitability.
• Contractual Obligations: Franchise agreements often have strict contractual obligations, and failure to comply may result in the termination of the franchise.
• Shared Reputation: The actions of one franchisee can affect the overall reputation of the entire franchise system, and negative publicity in one location may impact others.

Steps to Buying a Franchise

1. Research Franchises. Identify your industry preferences, assess your skill set, and learn as much as possible about different franchise businesses. Determined entrepreneurs may find that they’re interested in many different industries, so research the options to select the right franchise for your new business.
2. Review the Franchise Disclosure Document (FDD) for legal and financial details of different franchises before deciding which franchise opportunity is best for your own business. Take this time to understand all costs and fees associated with the franchise, including initial investment, royalty fees, and franchise fees.
3. Network with other franchise owners. Once you’ve narrowed down your decision for a new franchise, connect with existing business owners to learn more about their experience in franchise ownership. They’re usually open to discussing their experience as a startup in the franchise system and are willing to help prospective franchisees.
4. Secure financing. Assess your personal finances, net worth, and determine the budget for the business venture. Map out the goals for gross sales and startup costs. Research small business loans (SBA loans) and partnerships, and do as much due diligence as possible about the return on investment for a successful franchise.
5. Prepare a comprehensive business plan to present to potential lenders.
6. Research and identify suitable real estate for the franchise. Consider factors like foot traffic, demographics, and competition.
7. Negotiate the franchise agreement with the help of a lawyer. Make sure you understand the agreement’s terms, obligations, and restrictions. Negotiate terms, if necessary, and ensure that you align on all details relating to renewal and termination conditions.
8. Complete your franchisor’s training program. Familiarize yourself with operational processes, marketing strategies, and brand standards. Use ongoing support from the franchisor, including marketing, operations, and troubleshooting assistance.

Visit BizQuest’s Franchise Directory to find the right franchise for you.