Franchising offers many benefits, including a proven business model, established brand recognition, and ongoing support from the franchisor. However, buying a franchise is a significant financial and personal investment that requires careful consideration and research.
According to the International Franchise Association (2021), franchising has been a steadily growing industry for the past decade, with over 8.3 million jobs in the United States alone, contributing to over $670 billion in economic output. It is estimated to have grown to over 792,000 franchise establishments in 2022, contributing to economic output of approximately $827 billion and providing employment opportunities to almost 8.5 million people.
In this blog, we will cover everything you need to know about buying a franchise, from conducting thorough research and understanding the franchise agreement to finance options and choosing the right franchise for your goals and strengths. By the end of this blog, you will have a comprehensive understanding of the buying process for a franchise and be equipped with the knowledge and resources to make an informed decision.
Conducting thorough research is a critical step in the franchise buying process. This research should include a deep dive into the franchise system's history, business model, financial performance, and the support and resources they provide to franchisees. Also, consider the franchisor's expectations for franchisee performance.
It's important to research the franchisor's reputation thoroughly, including any legal or regulatory issues they may have faced. Remember to take into account the overall investment required such as royalties and advertising fees to get an accurate understanding of how much money will be required to operate the business.
There are several resources available for franchise research, including the IFA, franchise associations, and franchisee associations. You can search for information about the franchisor online, including reviews and news articles, and consult with current and former franchisees to get an insider perspective on the franchise system. You can also check with the Better Business Bureau or state franchise regulators to see if there have been any complaints or legal actions against the franchisor.
Understanding the Franchise Agreement
The franchise agreement is a legal contract between the franchisor and the franchisee that outlines the franchise terms and conditions. It is essential to review the franchise agreement thoroughly and with a lawyer before signing.
Some key terms to look for in a franchise agreement include:
- Initial franchise fee: This is the fee paid by the franchisee to the franchisor to purchase the rights to operate the franchise.
- Royalties: These are ongoing fees paid by the franchisee to the franchisor, typically based on a percentage of the gross revenue generated. For instance, Subway charges 8% of total gross sales as royalty fees.
- Marketing fees: Some franchisors require franchisees to contribute to a national or regional marketing fund. For instance, Subway applies a fee of approximately 4.5% of total gross sales to cover advertising and promotion costs.
- Termination clauses: These outline the circumstances under which the franchisor or franchisee can terminate the franchise agreement.
- Renewal terms: This outlines the terms and conditions for renewing the franchise agreement at the end of the initial term.
The franchise agreement should include information on the franchisee's rights and responsibilities, the franchisor's obligations, the length of time you will own the franchise, restrictions on running your business, and obligations of both parties. It's also important to look for specific terms such as the franchisor's right of first refusal, non-compete clauses, and limitations on the franchisee's ability to transfer or sell the franchise.
Make sure to read through the entire agreement carefully, have a lawyer review it with you, and ask questions about anything unclear before signing. A lawyer can help you understand the legal terms and obligations of the agreement and ensure that you are aware of any potential risks or liabilities.
Financing a Franchise
It's important to develop a comprehensive business plan that includes projections for revenue, expenses, and cash flow. A comprehensive business plan will demonstrate to potential lenders that you have a solid understanding of the business and its financials. A business plan should outline your financial projections, including startup costs, ongoing expenses, and revenue projections.
Some financing options for buying a franchise include:
- Personal Savings: Many franchisees use personal savings to fund their initial investment in a franchise.
- Small Business Administration (SBA) Loans: The SBA offers loans to small businesses, including franchises, to help with startup costs.
- Franchisor Financing: Some franchisors offer financing, such as installment payments or loans, to help franchisees fund their investment.
- Private Loans: Private lenders may also offer loans to finance the purchase of a franchise.
- Crowdfunding: This allows individuals or organizations to contribute money towards financing your venture
Remember to be realistic about the financial commitment of owning a franchise. Apart from the initial franchise fee, additional fees may include ongoing marketing fees and royalties, as well as cover expenses such as rent, inventory, and employee wages. By carefully evaluating your financing options, developing a solid business plan, and preparing financially, you can position yourself for success as a franchisee.
Training and Support
Once you become a franchisee, you will typically receive training and support from the franchisor. This training can range from initial training before opening your franchise to ongoing training and support throughout your ownership.
It's important to understand the level of training and support the franchisor provides before buying a franchise. Some franchisors may offer extensive training programs, while others may offer minimal support. Some franchisors may require franchisees to attend regular training sessions or to complete certain certifications to ensure that they are operating the franchise according to the franchisor's standards.
In addition to initial and ongoing training, franchisors may also provide ongoing support to franchisees. This support can take the form of marketing and advertising assistance, site selection and lease negotiation assistance, operational support, access to proprietary software or other technology,.online resources such as webinars and training modules, as well as in-person training and mentorship programs. Some franchise systems also offer peer-to-peer networking opportunities to help franchisees connect and share best practices.
Choosing the Right Franchise
It's important to identify your personal goals and strengths before selecting a franchise opportunity. This may include considering your previous work experience, skills, and interests, as well as your financial goals and lifestyle preferences. For example, if you have experience in the food industry, you may want to consider a food-based franchise.
Once you have identified your personal goals and strengths, you can begin evaluating different franchise opportunities. It's essential to consider the market potential for the franchise, including the overall size of the market and any trends or shifts in the franchising industry and consumer behavior.
You should also evaluate the competition in the market and consider the franchise's unique value proposition and competitive advantages. This may include looking at the franchise's brand recognition, proprietary products or services, or other factors that set it apart from other businesses in the market.
Buying a franchise can be an excellent way to start a business with the benefits of an established brand, a proven business model, and ongoing support. However, it's crucial to approach the process with due diligence and careful consideration. Thorough research, understanding the franchise agreement, financial preparation, training and support, and selecting the right franchise are all critical steps towards success as a franchisee.
Remember that buying a franchise is a significant financial commitment, and it's important to view it as a long-term investment. To ensure success, you should seek expert advice, develop a solid business plan, and be prepared to put in the time and effort required to build and grow your franchise. With the right approach and support, buying a franchise can be a rewarding and profitable venture.