What is a franchise?
A franchise is an opportunity where a company (the franchisor) licenses out its business strategy and products to third-party entrepreneurs who independently own and operate a specific location. You receive the right to use the brand’s trademark and business model in exchange for a franchising fee and an ongoing royalty on sales. When purchasing 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.
Chains and franchises are different, even though both can result in multiple locations of the same store or restaurant. Corporate-owned chains fall under the ownership and control of the founding company. Franchises are owned by other people, not the corporation.
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 faster than starting from scratch. Some people buy a franchise with the intention of selling it for a profit once it becomes an established location, while others want to make a long-term career out of their first franchise and eventually 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 building a new brand and testing marketing strategies, you can invest in a franchise and have access to the franchisor’s tested techniques and a network of other franchise owners. A franchisor wants 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.
Risks of investing in a franchise
There can be risks to investing in a franchise, so do thorough research. Potential risks include:
- Changes in the market or economic conditions that impact your profitability
- A new franchisor who sells an untested business model
- A franchisor who’s unable to provide support to franchisees
- Choosing a fad business that loses popularity quickly
- New government regulations that impact your operations
- Hidden costs
- Geographical differences that make a franchise less successful in some areas
- Damage to your reputation if a different franchisee makes a major mistake that goes viral
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. Others want to handle the daily operations of their location directly 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 less expensive franchise options can also be less lucrative but more stable, while a new, unproven franchise may have a high potential for profit but a greater 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 plan how to pay for expenses and living costs during the initial growth period. 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 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 plans and turnovers. You should read the FDD thoroughly and consider seeking advice from a franchise lawyer.
6. Talk to other franchise owners
Reach out to investment franchise owners from your top choices and ask for their perspectives on the benefits and drawbacks of investing in that particular company. You can ask about the support network, company culture, training and other factors that could influence your future success.
What to look for in a franchise
Before investing in franchises, look at various metrics and information. Also, consider how the local market might impact your decision. Some things to look for and investigate when deciding how to invest in a franchise include:
- A proven record of profitability
- Values and morals of the franchisor
- Franchisor’s reputation
- Total required investment
- Ongoing expenses
- Application and approval process
- Amount and type of support
- Territory rights
- Chances of repeat business, such as a consumable product that customers will come back for regularly
- Ability to upsell to make larger sales
- Amount of local competition
- How well the products or services would appeal to people in your region
Frequently asked questions about investing in franchises
Here are some frequently asked questions small business owners have about investing in a franchise:
Are franchises a good investment?
Whether a franchise is a good investment depends on the type of business, location, reputation and startup costs. Some franchises have the potential to be extremely profitable while others might be unproven and financially risky. Your skills as a business owner also come into play. Even with the support of the franchisor, you still need to make wise decisions to make the franchise profitable.
What are the common fees associated with investing in franchises?
Franchises often come with a large initial opening franchise fee—expect to pay $20,000 to $50,000 for this fee, according to the U.S. Small Business Administration. However, that’s not your total investment to start the company. You’ll also typically pay other startup and ongoing fees, which can include:
- Royalties based on your revenue, which usually range from 4% to 12% or higher
- Marketing fees
- Professional fees
- Real estate fees
What are the financing options when buying a franchise?
Since investing in a franchise often requires a large initial outlay, financing may be your only choice. You can explore financing options in addition to the liquid assets you have ready to use for the purchase. Some franchisors offer financing through the company. A traditional or SBA-backed loan is a possibility, or you might find a partner to invest in the franchise. You can also try outside investors, crowdfunding and alternative lenders.
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 available in your price range and geographical area. There are many online franchise directories that provide relevant details about various opportunities.