If you want to start a new business, franchising could be an excellent option. Franchises exist in almost every industry, so you have wide-ranging opportunities. But how do you narrow your choices and select the best franchise for you?
With a franchise, you can be your own boss while benefiting from a proven product or service. However, you still must put in extraordinary effort, so finding a good fit for your passion and skill set is crucial. You should consider numerous factors, including franchise costs and corporate support.
If you’re considering franchising, check the following boxes to ensure you choose the best opportunity for your needs, goals and budget.
As with starting a career or opening any new business, you must understand your preferences and needs when looking into franchising. Ask the following questions to ensure you start your franchise journey with a clear understanding of what’s best for you:
Once you understand the parameters you’ll need in your franchising journey and know your preferred industry, it’s time to research companies with franchising opportunities that fit the bill. Start by looking at the biggest names in your industry. These companies likely have storefronts in nearly every major city and many states. Research whether these companies offer business franchising opportunities and commit to contacting those that do.
Find businesses and franchises for sale online via various websites, including BizBuySell, BusinessBroker.net and Franchise Gator.
Many companies operate web pages entirely devoted to their franchising opportunities. Locate these online resources and use them to get more information and contact the franchises that interest you. Chances are you’ll hear back within 24 hours and get the opportunity to schedule a call – take it. If you get a reply long after 24 hours, you may fare better pursuing other franchises.
During your scheduled call, ask about the states where the franchisor is seeking franchisees and how successful other franchisees have been. Consider this call a low-stakes introductory discussion – you’re just trying to understand franchising basics and determine if the franchise makes sense for you.
Remember that the person you’re talking with is also on a fact-finding mission. This is a good time to determine the franchisors’ requirements and parameters. Perhaps they want franchisees to have specific industry experience. They may want franchisees to have basic business know-how and an entrepreneurial drive to succeed. Many franchisors want franchisees who understand marketing, customer service and sales – and are concerned with increasing transactions.
Determine if your business experience and entrepreneurial ideas fit the franchisor’s vision of promising franchisees.
After pinpointing a promising franchise opportunity, visit franchise storefronts in different regions to see if their branding and operations are consistent across locations. Observe all customer-facing employees to confirm that they treat customers appropriately. Be sure all locations you visit are clean and well organized. These are all signs that your potential franchisor truly invests in its franchisees.
The best way to learn about a franchise is to talk directly to involved participants. Ask them about the franchisor’s support system, licensing fees and any exclusivity it offers within a specific ZIP code or radius from a particular location.
Some franchises hold a “discovery day” or similar events where you can speak to representatives and learn more about franchising opportunities. Similarly, attending franchising industry conferences, such as the International Franchise Association’s annual conference, is an excellent way to identify and compare options.
The following resources can also help you select a franchise:
Find a franchisor that will be a true partner in growing your business and supporting your efforts. Ask the franchisor representatives specific questions, and talk to current franchisees to get a sense of how the franchisor supports its partners.
Everything you’ve learned from talking to current franchisees and the franchisor might remind you that starting a franchise is expensive. You can really get a sense of the numbers with a Franchise Disclosure Document (FDD). Here, you’ll see your royalties, franchise fees, required payments to mandatory vendors and brand funds.
Beyond these fees, consider the cost of any equipment you’ll need and any marketing campaigns you’ll undertake. There are also build-out costs and business licenses to consider, not to mention paying employees. You’ll face fewer financial challenges if you meet the franchisor’s liquid capital and net worth requirements.
Explore all franchise financing options available, including franchisor financing, bank loans, loans from family and friends, SBA loans, and alternative loans.
You should also evaluate ongoing costs, such as the cost of obtaining the goods you’ll use or sell. Franchisors often require franchisees to use a predetermined set of vendors with preset markups on their sale prices. The latter may increase your purchasing costs.
As you investigate these ongoing costs, review your FDD to see the franchisor’s litigation and bankruptcy history. Doing so can preview any challenges you might face in operating your location. Use the FDD to find the franchisor’s number of open and closed locations and the reasons behind the closures. Consider reaching out to departed franchisees for meaningful feedback to complement the commentary you’ve already gotten.
In many cases, franchisors will give you a formal Item 19 document outlining your potential sales, revenue and profit. Review this document and confirm that there are many locations, both owned and franchised, in the performance calculations. Ask questions based on these numbers. If your franchisor declines to share an Item 19, ask why.
Your franchising agreement should give your storefront exclusive operating rights within a specific vicinity. Look for such language in your contract, and inquire with your franchisor about any concerns.
Similarly, review your contract to understand the extent of training you’ll get at the start and franchisor support thereafter. You should be confident that you have the franchisor’s full backing every step of the way.
Since franchisors will often lock you into a 10-year contract, you should reflect on the journey you undertook to choose this franchise. Did you feel comfortable asking the franchisor questions? Were there yellow or red flags along the way? Is there a clear opportunity to make meaningful money? If you feel you’re in a good place, follow your instincts and sign the contract.
Since a franchise agreement is a long-term contract that is difficult to exit, master your contract management skills, including reading the fine print, before signing on the dotted line.
Your chosen franchise may look like a good fit on paper, but some more nuanced factors are involved in choosing a franchise. To help ensure a successful relationship and partnership with your franchisor, consider the following:
While franchise agreements and business partnership agreements have some similarities, franchise agreements are broader and encompass specific financial liabilities, business operation parameters and more.
A franchise disclosure document (FDD) contains 23 sections that detail key points about the franchise, including the franchisor’s obligations to a franchisee and all possible fees. By law, the franchisor must provide this document to franchisees before any money is exchanged. Here are some important sections to read carefully:
A franchise agreement is a binding legal document between a franchisor and a franchisee outlining the operation’s expectations, obligations, permissions and restrictions. It also provides a schedule of the fees the franchisee will pay to the franchisor, including amounts or percentages and payment frequency.
A franchise agreement assigns the rights to use a franchisor’s intellectual property and resources to a franchisee for a predetermined period. The rights and allowances assigned to a franchisee are very specific, leaving little room for expansion or error. These provisions are enforced to ensure brand representation is consistent with the franchisor’s standards and how the brand is portrayed universally.
Buying a franchise eliminates significant business development tasks you’d need to invest in if you built a business from the ground up. There are significant advantages for those who lack experience in starting a business. Buying a franchise provides the following benefits:
Average startup costs for a franchise range from $100,000 to $300,000. However, in some cases, you’ll spend as little as $10,000 or as much as $5 million. These numbers, of course, vary by industry and territory. In general, though, launching a mobile or home-based franchise costs less than starting hospitality and restaurant franchises.
The typical profit you’ll make on a franchise is 4 to 12 percent of the location’s gross revenue. Your territory, franchise type, business savvy and investment level will affect your profits. You may also find that your profit margins increase over time.
Often, you’ll earn a predictable salary as a franchise owner. However, in some cases, you may be able to draw from the equity you’ve earned in your franchise. This option is typically exclusive to franchises that operate as sole proprietorships, partnerships, LLCs or S corporations. Many franchisors, though, are C corporations, putting equity draws out of reach for you.
Over the years, studies have found various franchise failure rates – some as low as 20 percent and some as high as 50 percent. Other franchises are known for failure rates as low as 2 percent. You may want to research these low-failure franchises and see if you’d get to do work you enjoy as a franchisee. Couple that with proof of success from an FDD and great feedback from other franchisees, and failure is unlikely.
The franchising process isn’t complicated; it’s just lengthy. You’ll need plenty of time to carefully review the franchisor’s documents, think about your interactions with them and get other franchisees’ feedback. Along the way, you’ll mostly work with information that’s easy to understand. Use it to make smart decisions, and opening the doors on your franchise location should be the start of a great new adventure.
Sean Peek and Marci Martin contributed to this article.