Buying a franchise might be your golden ticket to owning your own business, but you want a little more control through structure rather than starting from scratch. This is one of the most well-known paths to business ownership without reinventing the wheel.
Once you have purchased a franchise business, you’re not simply buying a logo or a name. You are purchasing into a tested business model utilizing tested processes, marketing clout, and training. It’s similar to beginning a business with an initial step and a playbook.
There are franchises available in almost every type of business area imaginable. While the franchise model has several benefits, it does not equate to complete autopilot and passive earnings.
This guide will outline the 7 main steps to becoming a franchise owner with true world examples you should consider so you can be ready with a plan that works.
Franchising is one of the most structured ways to become a business owner. If you desire the independence and creativity of entrepreneurship, a franchise consultant can help you determine if franchising is the right path to business ownership.
It allows you to have control over every aspect of your business, while at the same time allowing you to benefit from having a successful system already in place.
Through this setup, new franchisees benefit from:
- You will be able to build on an already-established brand and reputation.
- You'll get instant credibility and brand recognition.
- Existing customers will automatically give you their trust.
- You'll gain access to professional management advice and advertising resources.
Types of Franchise Models
Franchising typically falls into one of two categories:
Product Distribution Franchises:
These focus primarily on product sales (i.e., automobile dealerships) and allow the franchisee to sell the products, but they have no obligation to operate under an internally developed management structure.
Business Format Franchises
In contrast to product distribution franchises, business format franchises include all aspects of your operations, advertising, customer service and every aspect of operating a business for which you purchase the right to use the franchisor’s business model.
Key Considerations
Brand Recognition
Incorporating a well-known name from a certain franchise gives you instant brand recognition. However, as previously stated, this usually has a price tag attached.
As reported by Franchise Business Review, 90% of franchisees said that having brand recognition was key to their initial success. Why is this? Customers enter a business if it’s familiar to them, which translates to more foot traffic & sales right off the bat.
Business System
You don’t have to start from scratch when it comes to franchising. Franchise systems provide a tried and true structure for running a business, as well as training and support in how to operate and promote your business.
The way you run your franchise is usually regulated by the franchisor, so you will be limited in terms of how much latitude you have to make your own decisions about the operation of your business.
If you decide to purchase a franchise, you agree to follow all of the rules and guidelines of the franchise. This is an important point to include in your questions to ask franchisor before making a commitment, as it may limit your creative control and ability to operate independently.
Parent Company Support
Support from the parent company is one of the greatest advantages in running your own franchise. Most franchises will continue to assist with the operation of your franchise through support for many years after opening.
Typically, as far back as the initial training and all the way up to and including national and local advertising campaigns, along with continued operational support.
In fact, the IFA states that nearly 80 percent of franchisors report that they continue to provide support and direction.
Step 2: Exploring Franchise Opportunities and Finding the Right Match
In today’s competitive franchise marketplace with an abundance of choices in every imaginable niche, finding a franchise that fits your personal interests, experience level, and financial situation may be a daunting task, especially when considering important factors such as franchise owner responsibilities.
But when you do find the right match for your skills and passions, that can help create long-term success as you grow together.
Yes, everyone wants to partner up with the big boys and girls, but sometimes the “diamond in the rough” that you need is a smaller company that is already making a name for itself in your community.
Start with You
Do not immediately begin looking at franchise directories and jumping on trending franchises. Take time to look within yourself before choosing a franchise. Do you want to be the type of entrepreneur who owns a small cozy coffee shop or an entrepreneur who wants to own multiple locations?
Whatever you decide, it needs to reflect your definition of success. The key is selecting a franchisor whose system will allow you to wake up each morning to go to work with excitement.
Questions to Ask Yourself When Finding the Right Franchise Opportunity
1. What type of franchise owner am I, and are there franchises that would help me realize this? Business is a part of your life -don’t let it consume your entire life.
2. Are some of the top franchises’ brands going to fit with who I am and where I’m heading? Brand recognition isn’t everything; it’s also all about how well you will fit.
3. Where are some of the industries that I find myself drawn to, which ones have an upward trend in growth and opportunity? The amount of passion you put into your work matters, but so does time and the trends of each industry.
4. Is there enough room to grow? Can I go from one store location to ten? Can I scale? Do they offer expansion opportunities or is it more like a fad?
5. Can I afford, financially and skill-wise, to start a franchise?
6. Just how tough will it be to compete in my local market? One area may love a certain brand, while another may hate it.
7. How much money will continue to leave my pocket every month? Marketing fees are generally 1%-5% of gross sales. Royalties for franchises typically take some amount of your monthly gross income, regardless of whether or not you’re profiting.
8. What types of help can I expect from the franchisor? Read over the FDD (Franchise Disclosure Document) and review all information regarding training and ongoing operational support provided by the franchisor.
9. Is this franchise an opportunity that supports me in achieving my goals? If so, then hold out for the perfect fit as you continue to investigate a franchise opportunity.
Before attending Discovery Day, learn how to prepare, evaluate, and ask the right questions in our guide “Franchise Discovery Day: 8 Ways to Maximize It!”
Step 3: Reviewing the Franchise Disclosure Documents (FDD)
The FDD is what I call your franchise “playbook.” You should understand it before exploring franchising, as it helps determine whether a franchise fits your finances, experience, and overall franchise business plan.
To help you evaluate potential franchises, here are the key areas to read in the FDD:
Franchise Fees and Initial Investment Costs
First things first: how much is this actually going to cost? In addition to the franchise fees, other costs that may be included in the total investment for your new franchise include equipment, inventory, signage and possibly even real estate.
Take a good, hard look at those numbers. Those numbers will give you a better idea of how much money it will take to open the doors and get your franchise started.
Ongoing Costs and Royalty Fees
Franchisees will typically need to make ongoing monthly or annual royalty payments based on their gross sales. In some cases, franchisees will still have to make those payments even if they haven’t turned a profit in the location.
Most franchises also charge an additional contribution for national advertising and local marketing. The money you contribute goes toward supporting the overall branding of your franchisor and helping create an awareness of your store.
Financial Statements and Performance
We also want to know how well the company has been performing financially. This information can be found in the company’s financial statement section of the franchise disclosure document.
When reviewing these statements, you will find out if the company has a stable financial history or not. A financially strong franchisor can ensure success for itself and its new franchise owners. An unstable financial history may give you reason to pause before deciding to purchase a franchise from this company.
Beyond financial performance, it’s also important to assess whether a franchise can succeed in your specific local market—learn more in ‘How Can You Determine if a Franchise will Work in Your Area?’
Franchise Owner Access to Support
A benefit of a franchise business model is the systems and management assistance it provides. The FDD also outlines what kind of training and support will be available to the franchise owner.
Keep in mind that the support you receive from the franchisor may limit your independence. The franchisor may have significant influence over how you run your business and may place restrictions on which services you are allowed to offer.
Step 4: Calculating Total Costs and Securing Financing
Buying a franchise isn’t just about paying the initial fee and opening your doors. There are multiple layers of costs to consider, including how you plan to secure a franchise loan. Performing due diligence on these figures early can make or break success for a future business owner.
The initial fee typically ranges from tens of thousands to several hundred thousand dollars.
Types of Costs to Consider
Initial Franchise Fee and Startup Costs
The cost of an initial franchise fee provides you the right to use the brand names of the franchise company as well as the successful system, along with all the support that comes with it. This is where your journey begins.
Ongoing Costs
Royalty payments generally a percentage of gross sales. These are recurring fees for being in business. Franchise royalties can be paid by franchise owners whether or not they are profitable.
As royalties are generally figured from gross sales revenue, it does not matter to the franchisor whether the franchise owner is earning money from the sale of products.
Operating Expenses
In addition to your payments to the franchisor, you will be responsible for all of the “day-to-day” or “operating” expenses of your business, including payroll, rental or lease expense, utility bills and many others.
When purchasing a business that has already been in operation for some time, the new owner usually receives an established customer base as well as experienced employees. This can help to reduce much of the risk associated with starting a new business.
Marketing and Advertising
You will probably be required to pay into a joint fund for national advertising and marketing when you purchase a franchise. The benefit of being part of a large organization is obvious.
However, depending upon your location, you may also need to advertise locally to compete with local competitors.
Key Considerations
Financing Options
Financing is an option for many new franchisees who do not have enough money available to invest the total amount required by the franchisor.
At this stage, many prospective owners ask: Are franchises a good investment and what is their long-term return potential? Learn more in our guide “Are Franchises a Good Investment?”.
Many new franchisees use franchise financing to bridge the gap. You can seek a deal through:
First, there is a bank loan. The bank loan is a common type of financing and comes from banks. You may consider using SBA funding. It provides better terms than most commercial lenders for businesses.
A third source for franchise financing may be provided directly by the franchisor itself.
Budgeting for Ongoing Costs
As with most things in life, it’s very easy to be focused on the “cost” of getting started with a new business venture, the initial investment and overlook all of the ongoing costs that will require your dollars each month.
Before finalizing your investment, it’s important to understand what returns you can realistically expect—see “Franchise ROI: 5 Things To Expect” for key performance insights.
Gross Sales Projections
Reviewing the financial performances as described in the FDD is a good starting point for estimating your projected earnings. However, you should look beyond just ideas or projections.
Validating Franchisee Performance
Speak with existing franchisees to learn how much money they are earning from gross sales and how much assistance they have received in managing those sales.
Step 5: Assessing Franchise Agreements and Franchise Law Compliance
Before becoming an official member of a franchise system, you will have to sign a contract, which is a legally enforceable franchise agreement between you and the franchisor.
The contract outlines both daily operational responsibilities and what type of support you can receive from the brand.
It is your guide on how to operate your franchise; you must conduct in-depth research into the franchisor before signing.
The manual will provide you with the rights to utilize brand names, guidelines for selecting sites, and operational advice that you will be able to use in managing your own company.
Given that this is a highly technical and legally based document governed under franchise law, it is recommended that you review it with a qualified attorney.
Key Considerations
Brand’s Trademark
The agreement allows you to utilize the franchisor’s name and logo. The recognition of this trademark is a significant portion of what you are paying for. You are purchasing into an existing name that has an established level of trust.
Your agreement will outline how the franchisee must represent the brand. Your ability to create and operate as you wish may be limited by such guidelines. However, your ability to leverage the established reputation of the brand will increase.
Franchise Location Requirements
Your contract with the franchisor should include specifics as to where you select a location. Check out how many franchises there are within your community, including both franchise locations and company-owned.
Many franchises will even protect your territory, which means no other franchisee of the same name can open up in your immediate vicinity. This is all about giving you the greatest opportunity to be successful and protecting the franchise’s business model.
Ongoing Support and Franchise Training Program
One of the major advantages of purchasing a franchise over starting your own business is the proven systems in place. You should be clear about what training you will receive under your agreement.
The quality of this training varies, so it would be best for interested owners to ask about the program and speak with current owners about their experience with the training provided by the franchisor
Franchise Fees and Royalties
There is an upfront cost for accessing the franchise brand in addition to all of the other start-up expenses, including build out, equipment and a minimum of six months’ worth of working capital.
You will also be required to make monthly royalty payments based on your gross sales. In many cases, even if you lose money each month, you will still be required to make these monthly royalty payments.
Step 6: Evaluating Franchisor Support and Training Programs
Franchisees can expect to be supported by their franchisors to help them achieve success in their own businesses.
The support provided through great training and ongoing guidance is an integral component of the value that a successful franchisee receives as part of their contract.
Types of Support to Look For
Initial Training Programs
The purpose of these programs is to enable a new franchisee with a strong foundation in order to run. New franchisees will learn about all aspects of the business model, including how to offer high-quality service as well as management of daily operational functions.
Ongoing Support
Many companies provide ongoing support as long as you continue to operate in accordance with their established systems. The structure and support offered by these systems provide a “safety net,” but are tied to the level of freedom a franchise owner will have when running their individual business.
Marketing Materials and Advertising Campaigns
Many franchise opportunities come complete with pre-made marketing materials, so you do not need to spend a great deal of money on developing your own marketing materials.
Franchisee Access to Resources
The vast majority of franchisors give you access to a virtual portal that contains an operating manual, advertising guide, and other resources. These tools help keep you aligned with corporate standards and all applicable franchise laws. This is also an important part of the questions to ask franchisor during your due diligence process.
Step 7: Setting Realistic Expectations and Planning for Long-Term Success
Franchise ownership is NOT an overnight wealth creation scheme; it is a very difficult, time-consuming effort that requires years of hard work and dedication to develop a solid franchise operation.
Regardless of how effective your franchise’s systems may be, no one can guarantee you will succeed at running your own franchise.
Long-Term Success Strategies
Growth Strategy
Consider what your next step is. Are you going to add new service lines to what your existing offerings have been? Many franchise agreements restrict what types of products and services the franchisee may sell, so they do not allow for innovation in those areas.
Expanding strategically at the right time allows you to maintain alignment with the overall image of the brand while allowing you to grow your own business. I would also say that slow, deliberate expansion is generally better than rapid expansion.
Adaptability
Franchise businesses have no room for complacency. Trends among consumers continue to evolve, competitive threats come from all directions, and what works today may not work tomorrow.
Business owners who thrive through adaptability will be the ones who create an evolving plan – with flexibility built into every aspect of the plan – as changes occur.
Customer Retention and Repeat Business
Repeat customers are what make a franchise successful. It’s their repeat business that generates the revenue for the franchise. Before purchasing a particular franchise, consider the demand in your community.
A variety of personal touches and loyalty programs will help transform single-visit customers into lifelong customers. When you provide an excellent experience at your location, it’s much easier to be remembered by potential customers, thus decreasing the amount of money needed for advertising.
Ongoing Costs and Operating Expenses
You will have continuing costs such as wages, products and supplies, and utilities in addition to an ongoing royalty expense for each dollar of gross sales, regardless of whether or not you make money.
Reviewing your cash flow monthly will help you determine what is really going on with your business, and by developing a good financial plan, you can avoid scrambling to come up with fees and instead begin planning for the long-term success of your business.
FAQs
Buying a franchise is a great option because, as a franchise owner, you can have all the benefits of being your own boss while having a successful and tested system in place. A recognized brand name is already established.
First, do some self-reflection. What do you want out of your business? How much money can you afford to invest in your business at startup? How many hours do you want to work each week?
Then search for franchise opportunities within an industry that aligns with your business experience, from food to home services or fitness.
An FDD contains financial information, litigation history, and an outline of what the franchisor provides as far as initial training. Carefully reviewing this document can help you have a better understanding of whether the franchisor has represented their franchise opportunities financially responsibly and if they are honest about who they represent.
The amount you can invest in a franchise is dependent on the type of franchise. The typical range for an initial franchise fee is tens of thousands of dollars to hundreds of thousands of dollars. It is possible that there will be no refund if you decide to cancel your agreement with the company.
Many established franchises assist their new owners with training, marketing assistance, guidance with management of employees and selling products once they open for business.
A new owner typically receives some form of an operating manual which outlines all aspects of managing the business, including employee hiring and firing, payroll, inventory control and customer service.
Final Thoughts: Taking the Leap into Franchise Ownership
Investing in a franchise is a decision that impacts more than an investor’s wallet; it’s a choice about their life.
Before making such a large franchise investment, potential buyers should consider learning about the franchise business model, reviewing the FDD, and understanding all of the operational costs to run a successful operation.
Being a part of becoming a franchisee is one of the best ways to become a small business owner. Not only do you get to use a tried-and-true method for generating revenue, but you also have the support of people who know how to generate revenue.
However, many franchise agreements prohibit franchisees from selling products or offering services other than those that were established by the franchisor. As such, as a franchisee, your ability to create new products may be limited.
Talk to FranchiseCoach or a legal advisor who can walk you through the fine print, especially when reviewing your franchise agreement. Getting the right guidance early can save you major headaches later.
