What is a franchise?
A franchise is the expansion of a successful, existing business. Investing in a franchise involves you as the franchisee gaining resources, guidance and training from a franchisor regarding the company’s procedures, brand, intellectual property and business model. You coordinate with the franchisor to develop a business strategy for the expansion and will set up a franchise agreement stating the fees and obligations you’re committing to.
Related: Investing in the Right Franchise
Benefits of opening a franchise
Opening a franchise with an existing company gives you a chance to challenge yourself and increase your financial status. Common benefits of opening a franchise include:
- Easier than starting a new business: Buying into a franchise that’s already successful is easier than starting a new business because you already have loyal customers, brand recognition and a strong profit coming in.
- Ongoing training and support: The franchisor continuously provides everything you need to build a stable and successful company, such as guidance, supplies, equipment, management training and marketing assistance.
- High success rate: Purchasing a franchise means investing in a business that’s already successful, which increases your chances of increasing its success further.
- More affordable inventory and supplies: The franchise’s parent company has a strong collective buying power, which often passes down to the franchise, giving you extra money toward supplies, inventory and other expenses.
Costs of opening a franchise
The costs to open a franchise vary among businesses, but there are basic expenses many franchisees pay. You’re essentially paying the franchisor to help get the businesses built and operating daily. Common costs of opening a franchise include:
Before officially purchasing a franchise, you may want to meet with a qualified franchise attorney to review the franchise agreement and franchise disclosure document.
You can consider hiring an accountant to help you keep track of the many expenses included when buying a franchise. They’ll set up your records and books and assist you in creating a budget and financial plan throughout the franchising process. Your franchisor may provide you with resources like account charts or accounting software to help you track this information.
Also known as your working capital, the day-to-day cash is the amount of cash your business has available to use each day. Budget your working capital to last for a certain time period, which is anywhere from a few months to a few years. This ensures the financial stability of your business while it grows.
Collaborate closely with the franchisor to learn what’s included in the franchise fees, since it often varies. Some franchise fees cover costs like site selection, support and guidance, training, licensing and rights to use the name. Learn and negotiate everything included in this fee before agreeing to it. You may need assistance from your legal advisor during this stage. Depending on how large or successful the franchise is, the fee can be anywhere from $10,000 to more than $100,000.
Construction and build-out costs
You must first find a location before determining the build-out and construction costs. Costs vary depending on the city’s real estate market. Once the franchisor approves of the location, you’ll estimate your costs. Common construction expenses to consider include:
- Contractor fees
- Contractor fees
- Zoning fees
- Decoration packages and fees
If you’re purchasing a home-based business that operates from a house or a mobile vehicle like a truck for example, then you’ll often pay little to no construction or location fees since you won’t need additional office space. Factor in computer, software and equipment costs to help the business operate properly from its current location.
Inventory and supplies
Retail franchises often require buying products in bulk and their displays, so budget for large stocks of inventory. Inventory prices vary greatly depending on how much your products are, how many are for sale and how quickly they’re being sold.
Budget for your franchise’s supplies as well. This can be utensils, straws and cups for a restaurant or pens, paper and post-it notes for an office. The franchisor should provide you with a detailed supply list before opening.
The franchisor typically offers training to the franchisee and sometimes one other employee. This is usually a workshop or conference that guides and advises you on how to open and operate a franchise. While they typically pay for the training, you’re often responsible for travel and other accommodations.
The pricing depends on how long you’re training lasts, which can be anywhere from a few days to a few months. This length depends on the franchisor’s preferences, your knowledge of operating a franchise and the complexity of the franchise itself.
Tips for choosing the right franchise for you
Finding the best franchise for you requires some research. Follow these tips to help you find and open a successful franchise:
Use the support and resources from your franchisor
A significant benefit to being a franchisee is the amount of resources you receive from your franchisor. They provide you with a business plan proven to be successful that you’ll carefully follow and use as a resource. They also offer training and guidance throughout the entire franchising process. Taking advantage of these resources ensures the financial success of your business and helps you establish a stronger relationship with the franchisor.
Be forthright about your finances
When meeting with the franchisor and explaining your financial goals and budget, make sure to tell them how much you can afford in expenses. Being open and transparent from the beginning keeps you and the franchisor from spending too much money, resulting in an unsteady financial situation or even debt. The franchisor may also review your credit and background check to discover if you have less than originally stated. Remaining honest with your franchisor can lead them to trust you more as a partner.
Pick a franchise you’re passionate about
To remain motivated and successful in running this franchise, invest in one you’re passionate about and believe in. Find a business model you see potential in. This gives you more enthusiasm to invest a significant portion of your time, money and other resources in it. Having a strong passion for a business increases the chances of its success and growth.
Read the franchise agreement carefully
Many franchise agreements are lengthy and contain several pages of complex details. It’s best to hire a legal professional to help you review the agreement carefully to ensure the benefits you receive are worth the cost. If you’re reading it alone, build a list of sections challenging to understand or sections you don’t agree with. Discuss these with your legal advisor, then present them to your franchisor.
Get advice from existing franchises
Before signing any documents, meet with experienced franchisees. They’ll provide you advice on what to look for in a franchise and may have knowledge of the success or reliability of the franchise you’re considering. They may even have a list of franchises that would be effective investments for you. Ask them more about their experience as a franchisee to help you understand dos and don’ts to avoid common mistakes new franchisees make.
How to hire employees for your franchise
Once you’ve built a budget and established your location, hire reliable employees to work alongside you as you open and operate the franchise. Follow these steps to successfully hire qualified candidates for your franchise:
1. Determine which roles you need and how many
Sit down with your franchisor to establish which roles are available and how many your budget allows. Establish how much you can pay, opportunities for advancement and benefits you’ll supply them. Listen to suggestions from your accountant and franchisor as you gather this information. Ask franchisors if they have any materials to provide you during the hiring process, including training programs, job description templates and other helpful onboarding materials.
2. Craft clear and detailed job descriptions
Write specific job descriptions that describe exactly what you need from candidates to be successful in their job. Explain the experience, skills and responsibilities of the role to make it easier to identify candidates who are the best fit.
3. Consider inside hires first
If there are already employees performing well within the company, consider them for roles with more responsibilities before outside hires. Inside hires mean less training, more familiarity with company culture and stronger employee loyalty. It also shows your current and future employees that you offer opportunities for advancement, which may encourage them to join or stay with the company.
4. Use effective recruitment methods
Reaching higher-quality talent means searching for employees in the right places. Some of these include:
- Include listings on social media channels. Post that your franchise is seeking candidates for new roles and ask your followers to share it with potential candidates. This helps your listing reach a larger audience and receive suggestions within your social media network, which can mean they’re stronger candidates.
- Use keywords to recruit. Search for candidates on job posting sites by using keywords related to the job title you’re hiring for. For example, search “marketing manager” to find potential marketing managers and learn how relevant their experience is by viewing their profile and job history.
- Interview candidates through video. Save time by completing the first few stages of the interview process via videos. Have them interview by recording themselves answering your pre-written questions for the first stage, then conduct a live video interview with them for the second round and meet them in person for the final round.
5. Create a structure for interviews
Build a routine to follow when interviewing candidates. It should be the same process for each applicant, using pre-made questions you ask each candidate. Your questions should make your candidates assess their experience and explain how they’ll put these skills and qualifications toward your role. You should also assess their personality, industry knowledge and work ethic.
Take your time getting to know each candidate to ensure you’re making the best decision on who’s right for the job. Try to have more than one person in your company interview them to gain varying opinions and perspectives on each candidate.
Frequently asked questions about opening a franchise
How much do franchises cost?
The cost to open a franchise varies on the type of franchise you want to work in. Home-based franchises are less expensive since you don’t usually pay for location and construction fees. To determine the budget, meet with the franchisor beforehand or read their website to understand all the costs.
How much do franchise owners make?
The amount of profit a franchise owner earns depends on the franchise they own and how many locations there are. As your franchise expands and becomes more established, your expenses may grow, but your profits should increase significantly alongside it. The longer you remain in the business, the more it can expand and provide you more income.
What percentage does a franchise take?
According to the U.S. Small Business Association, franchise royalties can start at 4% and eventually reach 12% or more, but the fees vary depending on the industry you work in and the franchise’s size. This royalty fee may also increase as the franchise grows.
Building a franchise takes time, resources and a large budget. Once you research and find the franchise you’re passionate about, you can see impressive financial success.