What is a franchise?
A franchise is when a company (the franchisor) licenses out its business strategy and products to third-party entrepreneurs who independently own and operate a specific location. You can purchase the right to use a large brand’s trademark and business model in exchange for a franchising fee and an ongoing royalty on sales. When operating a franchise, you typically sign a contractual agreement with the franchisor to operate your business within specific brand guidelines, and in return the franchisor helps you profit from their products and name recognition.
Read more: What Is a Franchise?
Why invest in a franchise
Due to the startup costs, a franchise is both a business opportunity and an investment. The industry knowledge, training and network of branded franchise partners can help you grow a profitable business. Some people buy a franchise with the intention of selling their business for a profit once it becomes an established location, while others may want to make a long-term career out of their first franchise and ultimately own multiple franchise locations. Since franchise operation is both hands-on and flexible, franchises offer new business owners an appealing balance of structure and freedom.
When investing in a franchise, you often get the advantage of developmental support from the parent company, including quality control, marketing strategy, training and general business advice. Instead of taking a chance on building a new brand and testing out marketing strategies, you can invest in a franchise and have access to the franchisor’s tested techniques and a network of other franchise owners. Franchisors want each store to be successful to earn royalties, so they typically do thorough research before selling a new location.
Franchisors help you find a lucrative location and secure real estate, which might get you started faster than if you had the responsibility of scouting out a storefront for a new business. Because franchises are typically standardized across locations, you also usually have access to their discount wholesale prices for inventory and other bulk services. This can significantly reduce your startup costs compared to sourcing your own equipment and buying inventory in smaller batches. Some large franchisors provide in-house financing for your initial investment, further simplifying the process of launching a new franchise.
How to choose a franchise opportunity
If investing in a franchise appeals to you, you have thousands of companies to choose from. When you buy a franchise, you enter a business partnership with the franchisor. Selecting a franchisor to work with is a serious decision that typically requires self-reflection and research. Follow these steps to choose a franchise investment that suits your goals:
1. Set goals
Decide what you want out of your franchise business by reflecting on your personal goals. Some people prefer to invest in a franchise as a silent partner, funding the startup costs and paying someone else to do the hands-on management of the business itself. Others want to work closely with the daily operations of their location and operate their franchise as a full-time job.
In addition to envisioning your time commitment, set goals about how much you want to earn from your business venture. Some of the less expensive franchise options can also be less lucrative but more stable, while a new unproven franchise may have high potential for profit with a high level of investor risk.
2. Assess your finances
Perform an honest assessment of your finances and decide how much you want to invest in starting a franchise business. Franchises can take some time to become profitable, so you should prepare a plan for how to pay for expenses and living costs during the initial period of growth. Consider how much debt you’d be willing to take on in the form of loans, and research different financing options that you could qualify for. Once you have a price limit in mind, you can start narrowing your list of potential franchises.
3. List your strengths
Reflect on the skills, experience and strengths that you have to contribute to a business. Look for business models that would benefit the most from your expertise. Think about what aspects of the business you might need to outsource and look for franchisors that could add value where you need guidance.
Related: Self Evaluation Tips and Examples
4. Explore unconventional fields
Many people associate franchises with the restaurant business, but franchises exist in many industries. Financial services, gyms, tutoring centers, home maintenance services and spas are all popular among franchisees. If you have strong management skills, entering a unique field where you don’t have any local competition could be a worthwhile investment.
5. Research your shortlist
Make a list of the franchises that suit your interests, budget and skills and research each business’ reputation and viability in your area. Before franchisees sign any contracts, the Federal Trade Commission (FTC) requires that franchisors provide a Franchise Disclosure Document (FDD) that includes information about bankruptcies, litigation, payment plants and turnover. You should read the FDD thoroughly and consider enlisting a franchise lawyer for qualified advice.
6. Talk to other franchise owners
Reach out to franchise owners from your top choices and ask for their perspectives on the benefits and drawbacks of investing in that particular franchise. You can ask about the support network, company culture, training and other factors that could influence your future success.
Frequently asked questions about investing in franchises
Here are some frequently asked questions small business owners have about investing in a franchise business:
Are franchises a good investment?
Whether a franchise is a good investment depends on the type of franchise, location, reputation and startup costs. Some franchises have the potential to be extremely profitable while others might be unproven and financially risky.
What are the common fees associated with investing in franchises?
Franchises often come with a large initial opening franchise fee of thousands of dollars or more that includes the cost of training materials. You’ll also typically pay other startup and ongoing fees. The fees associated with investing in a franchise can include:
- Marketing fees
- Professional fees
- Real estate fees
Are there any risks to investing in franchises?
There can be risks to investing in a franchise, such as changes in the market or economic conditions that impact your profitability. A new franchisor may try to sell an untested business model or be unable to provide support to franchisees. Limit this risk by doing thorough research on every company you consider working with.
How can I find a franchise to invest in?
You can start looking for franchises by speaking to a franchise consultant or searching the internet for lists of franchises in your price range and geographical area.