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How to Choose the Right Franchise

Updated Jan 19, 2024

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Max Freedman
Business Operations Insider and Senior Analyst at businessnewsdaily.com
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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. 

How to choose the right franchise

If you’re considering franchising, check the following boxes to ensure you choose the best opportunity for your needs, goals and budget. 

1. Pinpoint your franchise preferences and needs. 

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: 

  • What are my personal goals? Everyone has different motivations for becoming a franchising entrepreneur. Perhaps you’ve always dreamed of starting a business and see opening a franchise as your best chance to earn a big salary. Your goal may be to spend more time at home or take an entrepreneurial step in your career. When you understand your personal goals, you can narrow your franchise search to opportunities that suit you. 
  • What type of industry do I want to conduct business in? A franchise may earn you money, but it won’t improve your quality of life if it’s in a field you don’t like. Take a moment to truly consider what you want to spend 40-plus hours per week doing. You can find franchises in nearly any industry – it’s not all fast-food restaurants and coffee shops. You can operate a franchise in tutoring or college prep, janitorial or cleaning services, restaurants and retail, health and wellness, or many other categories. Once you feel confident in your industry preference, pursue franchisors that align with your interests. 
  • What role do I want to play in the business? Be realistic about how involved you’d like to be in the franchise. Sometimes, franchisors expect franchisees to be heavily involved in day-to-day processes. Other times, you’ll work in more of a management role. Ask yourself which option you prefer, and choose franchisors that offer these opportunities.
  • What are my strengths? The most successful franchise owners do work that suits them and find ways to delegate or outsource other functions. When deciding on a franchise, understand that you don’t have to be an expert in everything. Determine the work you want to do and when you’ll likely delegate tasks to employees or outsourced professionals. 
  • What is my investment budget? There are franchises for every budget. Costs vary significantly by industry and business model. For example, opening a food franchise is much more expensive than a home-based, business-to-business (B2B) franchise due to the equipment and inventory needed to start the business. While some upfront fees are less than $10,000, others are over $1 million. Understand how much you are willing and able to invest in a franchise in your preferred industry.

2. Research companies offer franchising opportunities.

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.

TipTip

Find businesses and franchises for sale online via various websites, including BizBuySell, BusinessBroker.net and Franchise Gator.

3. Reach out to promising franchisors.

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. 

4. Ask questions during your initial franchisor call.

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.

5. Visit franchise locations.

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.

6. Get feedback from current 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:

TipTip

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.

7. Inquire about and add up all potential franchise starting costs. 

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.

Did You Know?Did you know

Explore all franchise financing options available, including franchisor financing, bank loans, loans from family and friends, SBA loans, and alternative loans.

8. Analyze your franchise’s ongoing costs and potential challenges.

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. 

9. Review the franchisor’s Item 19.

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.

10. Consider your franchise territories and support.

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.

11. Make your franchising decision.

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.

Key TakeawayKey takeaway

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.

What to look for when choosing a franchise

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:

  • Does the franchisor have a strong support system for franchisees? One of the biggest benefits of buying into a franchise is that the brand is already established. Ensure your franchisor is readily available to share knowledge and guidance and that other support systems, including other franchisees, are available.
  • Will your franchisor invest in your potential? The franchisor should indicate that it cares about your professional success and growth within the company. Some franchisors will even administer tests to determine a franchisee’s mindset and ambition. Look for indications that your franchisor believes in your potential and is willing to help you grow.
  • Is the franchisor professional? You want to work with highly professional franchisors. You can start determining a franchisor’s professionalism early in the relationship. For example, as you make initial inquiries, note how the franchisor handles your requests. Do representatives answer questions promptly and thoroughly? 
  • Are you and the franchisor clear about mutual expectations? Before signing a contract, you should be clear on what your potential franchisor expects of you (and vice versa) and ensure the deal is a good fit for both parties. Consider the deal a long-term partnership. Are you ready for the commitment, and can you meet the franchisor’s expectations? Can the franchisor meet your expectations?
  • Do you like the franchisor’s sales and business approach? Before diving into business with a franchisor, consider how it approaches sales, marketing and advertising. Consider whether these methods will succeed in the current marketplace and if you can afford the franchisor’s tactics and campaigns.
  • Does the franchisor have good reviews? Look for information on message boards, Facebook or LinkedIn groups, or articles where franchisees talk about their experiences with the franchisor. If the reviews are fairly consistent, you’ll get a good sense of the company’s business practices.
Did You Know?Did you know

While franchise agreements and business partnership agreements have some similarities, franchise agreements are broader and encompass specific financial liabilities, business operation parameters and more.

FAQ about opening a franchise

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:

  • Past or current litigation: Items 1 through 4 of the FDD will tell you all about the franchisor’s experience and whether the franchisor or any of the people in charge have been involved in bankruptcies or litigation relevant to the brand or their experience as a franchisor.
  • Payments and revenue model: The FDD also explains what you’ll pay to the franchisor and its affiliates before and after opening, as well as how much the franchisor relies on franchisees for revenue. Items 19 (Financial Performance Representations) and 21 (Financial Statements) provide especially helpful insights on how well the units are doing financially.
  • Turnover and resource strain: Item 20 of the FDD provides a list of currently operating franchisees and a list of franchisees who have exited the system or stopped communicating with the franchisor. Contacting current and former franchisees about the franchise’s profitability and challenges can give you the inside scoop on working with the franchisor.

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:

  • You’re buying into a proven business plan. When you buy into a franchise, you’ll likely receive a play-by-play business plan on conducting each process needed to run the business. These instructions can include everything from how to make fries to how to wash the floors. This proven manual has already worked out the kinks you might have had to discover on your own if you started a brand-new business.
  • The cost of operations is lower than with many other businesses. Running a franchise is cheaper than running other businesses, such as chain stores. Franchises have lower overhead because the franchisees often participate in day-to-day operations like serving or cleaning.
  • A lot of the marketing is done for you. As a franchisee, you benefit from the name recognition that comes with licensing a regional, national or international brand. Some franchisors supply additional funds for marketing activities or materials, such as posters.
  • Your supply chain and support systems are built out. Your franchisor has already worked hard to identify reliable and cost-effective suppliers and service providers that make your business run.

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.

Opening your doors is easier than you think

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. 

Max Freedman
Business Operations Insider and Senior Analyst at businessnewsdaily.com
Max Freedman, has spent nearly a decade providing entrepreneurs and business operators with actionable advice they can use to launch and grow their businesses. Max has direct experience helping run a small business, performs hands-on reviews and has real-world experience with the categories he covers, such as accounting software and digital payroll solutions, as well as leading small business lenders and employee retirement providers. Max has written hundreds of articles for Business News Daily on a range of valuable topics, including small business funding, time and attendance, marketing and human resources.
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