Want To Purchase A Franchise? Read This First
Ashley Kilroy10-minute read
April 11, 2021
If you’re tired of working for someone else, you may have considered starting your own business. The promise of entrepreneurship comes with freedom and flexibility, but it also comes with immense financial responsibility and stress. One alternative is to open a franchise. In doing so, you can own your own business while capitalizing on the success of a proven system.
So, if you’re contemplating purchasing a franchise, we’ve outlined some key considerations and how to determine if this could be the right business move for you.
Before we dive into some key considerations, it’s important to understand what a franchise is and how it works. Franchising is a distribution strategy that businesses may adopt to expand and grow their organizations. Franchisors (or the company) do this by trademarking their procedures, intellectual property, brand, rights to sell products or services, and use of their business model. Then they sell these rights to a franchisee who will pay their fees and agree to comply with their business standards and obligations.
There are two types of common franchises. The first is business format franchising. This method is where the franchisor provides the franchisee with everything they need to run the business as well as an entire operating system. The franchisee receives development support as well as training and employee manuals, marketing strategies, quality control, business advisory, and much more.
The other method is traditional or product distribution franchising. With product franchising, the manufacturer has control over the retail stores but allows franchise owners to use their trade name and trademark. You can find this method of franchising in industries like bottling, gasoline, automotive and other manufacturing trades.
Buying A Franchise Vs. Starting A Business
Now that you understand how franchising works, you may be wondering if it’s better to get into a franchise or start a business from scratch. Here are a few things to consider when identifying all your options.
Pros And Cons Of Buying A Franchise
When you buy a franchise, you buy a proven system. You don’t have to go through the trial and error of finding out what works and what doesn’t. You’re saving yourself from failure. Since all franchises tend to function under one system, they generally only need to worry about their daily business tasks. Franchisees undergo training on the franchisor’s products, management style, and conducting daily and ongoing business with their staff. The franchisor provides consistent support and guidance for all franchisees.
Additionally, when you buy a franchise, you buy their branding and name recognition. When starting a business from scratch, it may take a lot of time, effort and marketing dollars to gain brand loyalty. So, when you buy a franchise, you already have loyal customers willing to buy your product or service.
Even though there are some benefits to purchasing a franchise, there are a few downsides as well. One disadvantage of buying a franchise is that you will have to pay upfront and ongoing fees. This is because you’re using the franchisor’s system, and these fees pay for their support, brand name, and business model.
Also, franchisees have minimal control over business practices, products, store design, or other decisions in the company system. As a franchisee, you will have to follow specific guidelines to maintain your franchise license. The lack of control and freedom over your business may feel very restrictive and be discouraging at times.
Pros And Cons Of Starting A Business From Scratch
Starting a business from scratch gives you the ability to express your creativity and innovation. For those who are full of ideas and willing to solve problems, this option may be right up your alley.
Additionally, you can work anytime and anywhere you want. You don’t have to meet certain standards and you can determine your workflow. You have the ultimate freedom to build your business as big or as small as you want. No one can tell you what to do or how to do it.
But with freedom and flexibility, you also run the risk of failure. Unfortunately, since you are not working within a proven system, this risk may be higher. While it’s hard to determine the actual percentages of businesses that fail, starting your own company comes with a lot of challenges that make it hard for a new business to succeed.
Keep in mind, though, that high risk often yields high returns. So, if you decide to take a leap of faith into entrepreneurship, you may end up striking gold.
What Is The Best Franchise To Buy
According to Entrepreneur’s 2019 Franchise 500 Ranking, McDonald’s, Dunkin’, and Sonic Drive-In hold the top spots for the best franchises. They evaluate costs, fees, support, size and growth, brand strength and financial stability to determine the rankings. While this may give you an idea of successful franchises, it may not necessarily be indicative of what franchise will work for you.
When it comes to deciding which franchise to purchase, there are many different factors to consider. You’ll need to think about profit margin, innovation, growth, affordability and more. It’s also important to keep in mind your financial statistics and determine which franchise may work better in your community and fit your lifestyle needs.
For example, if you don’t have $1.1 to $2.2 million, you may not be able to buy a McDonald’s franchise. You will have to find the best franchise that fits your budget and qualifications. So, even if McDonald’s is more profitable in your community, you may have to find other options.
Is It Profitable To Open A Franchise?
Determining profitability is an essential consideration when assessing a franchise opportunity. Some key factors that may determine profitability include access to ongoing support, the franchise’s reviews, new franchisee success rates, average sales per unit and unit growth. By evaluating these aspects, you may be able to decide if the opportunity you’re considering would be a profitable enterprise.
Keep in mind, not every franchise is successful. It’s up to you to research the financial elements to see if investing your hard-earned money will yield a decent return.
How Much Money Do You Make Owning A Franchise?
It’s challenging to determine the exact amount of money you’ll make owning a franchise. Many different things can influence the profitability of your business. According to Franchise Business Review, franchise owners fall into two categories: top earners and average earners. For example, 37% of food and beverage franchise owners make less than $50,000, while the top 16% earn over $200,000 a year. The average income for food and beverage franchise owners was about $120,000 per year for franchise properties that have been in business for over two years, and the median was $70,000 per year.
Keep in mind that this is only an example of one industry. Numbers can fluctuate a lot depending on the type of business, location, fees, hours, turnover and more. If you’re considering the purchase of a franchise, you may want to dive into the specifics and see what other owners/operators are bringing home.
How To Own Your Own Franchise
If you have decided opening a franchise is right for you, there are a few steps you should take to begin your business venture. It’s important to note that each franchise may have its own set of rules, regulations and procedures. So, it’s important to conduct extensive research to make sure you’re following their processes.
Research Franchise Opportunities And Evaluate Your Financial Situation
Before you dive into any franchise purchase, you’ll want to understand what each company requires. Therefore, you’ll want to conduct extensive research on different opportunities. You’ll want to search for prospects that coincide with your budget, qualifications and interests.
You can find a lot of information about different franchises online. You can also ask friends or family members if they have experience working with a particular franchise. Here are some of the components you’ll want to include in your research:
Develop a Timeline: It’s wise to consider a timeline for purchasing your franchise. This will help you allocate time to your research and determine when to complete certain tasks.
Qualifications: Many franchisors set forth minimum requirements to make sure that all franchisees have the proper experience and personal finance qualifications to run a business. Franchisors may consider things such as your credit score, net worth, outside income and cash on hand, as well as industry and management experience.
Finances, Skills, Resources and Interests: During the research process, you may want to take the time to analyze your skills, interests and resources.Take into consideration what you’re capable of as a franchise owner.
Discover Franchise Opportunities: Now that you have identified some businesses that might work for you, try reviewing other franchises. This will give you an idea of the satisfaction level other owner/operators feel. You will also need to determine the total investment the franchisor requires, ongoing fees, competition and continuing training and support from the organization.
There are plenty of ways you can go about buying a franchise. The more research and time you put into finding one, the better the chances are that you will find the perfect fit.
Contact Franchisors For Franchise Disclosure Document
Once your research is complete and you select a couple of franchise candidates, you should contact the franchisors for the next steps. They may ask you to complete an initial questionnaire or application. Doing so will will help the franchisor determine if you meet their qualifications and might be a good owner to help expand their brand.
After reviewing your information, they may want to schedule an in-person meeting. At this meeting, they will provide a Franchise Disclosure Document, otherwise known as a Uniform Franchise Offering Circular. This document outlines the franchisee’s responsibilities, fee structure and guidelines. It will also provide information about the franchisor and their financial and legal history. However, this document may not offer the franchise’s business performance, volume, growth, reasons for unit closures or profitability.
Usually, your lender or financial institution will want to see a copy of the FDD. Since this document outlines the franchise’s business structure, all parties must read the entire document. You may also want to consult with a lawyer to understand the legality of your franchisee obligations.
Attend A Discovery Day
After you’ve reviewed the FDD, you may have the opportunity to meet with the franchisor’s management team for a discovery day. During this time, you and the franchisor will have the chance to decide if you’re both a good fit.
So, while you’re evaluating their business culture, personality, transparency and organization, they will be assessing your qualifications, enthusiasm about the business and commitment to their mission as well. Most franchisors look for those who exude leadership qualities and are team players.
Thoroughly Review Your Franchise Agreement And Make Your Decision
If you and the franchisor think you’re a good fit for the organization, you’ll receive a formal franchise agreement. Find a lawyer to ensure you have reviewed all the rules and regulations. Your lawyer can make sure you fully understand the workings of this agreement.
Confirm that all verbal agreements are also in writing. You will want to make sure that the franchisor addresses all your concerns before document signing. You may have to negotiate some amendments to the contract. If there are discrepancies left on the table, you may be out of luck if it’s not written in the contract.
For example, let’s say the franchisor says they will provide legal counseling in case someone sues your franchise. If this wasn’t in writing, there’s a chance they won’t uphold their verbal commitment. This could end up costing you a lot of financial and emotional stress. Bottom line: make sure everything is in writing before moving forward.
Identify Your Financing Options
If you decide to sign your agreement, you’ll want to secure financing. These funds will help you cover all expenses associated with the purchase of a franchise, including franchising fees. Keep in mind, depending on the franchise, you may need to find financing before signing the agreement.
To get financing, you will need a strong business plan which may include profit and growth projections. You will also want to include things that aren’t established in the FDD. For instance, you will need to disclose your franchise location, potential revenues, operating expenses for starting the business and maintaining it, and the total cost of financing the enterprise.
Here are a few financing options you may want to consider.
Small Business Administration (SBA) Loan: The U.S. Small Business Association works with lenders to provide small-business loans to applicants. SBA loans typically have low interest rates. However, this type of loan can be challenging to qualify for. You usually need a credit score over 680, must meet the size standards, and be able to provide a 20% down payment.
Small Business Loan from a Financial Institution: Conventional business loans are often more challenging to qualify for than SBA loans because they are not backed by the government. However, if you have a high net worth, an excellent credit history and a good business relationship with your financial institution, you may qualify.
Franchisor or Partner Lenders: It’s possible to receive financing through your franchisor or a partner lender for a portion of the franchise cost. If you’re having trouble financing your franchise, speak with your franchisor about their options. They may be able to connect you with lenders who are already familiar with the business model.
Rollovers as Business Start-Ups: A ROBS is when business owners use their retirement money to fund their new business endeavor. You may not have to pay early withdrawal penalties or taxes on your distribution. It’s wise to consult with a tax professional or a ROBS expert before moving forward with this funding option.
Take All Training, Workshops and Course Requirements
If you haven’t done so before purchasing your franchise, you may have to take all the training necessary to get it launched. Some may take a few weeks while other workshops and courses may be ongoing. Training will include marketing strategies, negotiating tactics, creation of reports, accounting, hiring and managing employees, equipment management and more.
Every franchisor will have different requirements when it comes to training and covering everything you need to know to be successful.
Get Ready For Your Grand Opening
If you are buying a franchise from another franchisee, you may not need to have a grand opening party. But, if you’re starting from scratch and opening a new location, it’s wise to promote your business. Your franchisor is likely to help you with the promotion and marketing for this event.
You may want to allocate a portion of your marketing budget for your grand opening event. Additionally, you may want to consult with other franchisees and your franchisor to determine what works and what doesn’t when throwing a launch party. This will help your event succeed.
The Bottom Line
There’s a lot that goes into deciding if investing in a franchise is right for you. If you think a franchise is the right business enterprise for your financial needs and your lifestyle, make sure to do all your research. The more research and time you spend evaluating this business venture, the better equipped you’ll be for making the right decisions.
But, if you’re ready to dive right in, consider using Rocket Loans for your personal loan needs. Rocket Loans offers a quick and easy application process that can help you fulfill your business dreams.
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