Buying a Franchise: Everything You Need to Know
Franchisees purchase a model that, in theory, already covers each stage of business, from branding and pricing to advertising and marketing.3 min read
2. Do Your Research
3. Know Your Strengths and Weaknesses
4. Get Your Finances in Order
5. Be Wary
What Is Buying a Franchise Like?
Before starting a business, shopping for a franchise could be a good alternative for an aspiring entrepreneur whose goal isn’t to produce a brand-new enterprise from scratch. Franchisees purchase a specific model that, in theory, already covers each stage of business, from branding and pricing to advertising and marketing.
An existing clientele will eagerly spend money at any Starbucks or KFC. The market has already examined the most effective recipes for frozen coffee drinks and buckets of fried chicken. Embarking on the journey to becoming a profitable franchisee is much more complex than merely discovering an interesting brand and putting down some money.
Do Your Research
Check out all the publicly obtainable information regarding the ins and outs of franchising. Be sure to read the Federal Trade Commission’s Guide to Buying a Franchise. Learn invaluable information like that many brands require their franchisees to spend a preset sum on promoting the brand but don't have any say in how these advertisements are done.
Also, take some time to look over The International Franchising Association’s Franchising 101 information and The American Association of Franchisees and Dealers’ Road Map to Selecting a Franchise, so you can learn as much as you can before getting involved in a franchise.
Know Your Strengths and Weaknesses
It’s often understood that military veterans are usually profitable franchisees. They tend to follow rules and are used to working within an extremely regulated system. Supremely creative folk who don’t follow recipes or tend to decorate with vivid paint colors would not make the best franchisees. You’re there to implement, not create.
Make sure you’re comfortable with topics such as cold-calling and B2B sales. If you’re not keen on either of these, you might want to rethink owning a franchise. Even though the model is there for you, you’ll still need to do some grunt work.
Ask family and friends for their opinions on whether or not your personality aligns with the business you’re thinking about. If you’re considering opening a TGI Fridays, ask yourself if you know anything about management and customer service. Don’t fall victim to the misconception that running a franchise is simple.
Get Your Finances in Order
Don’t just take into account the franchising fee and equipment costs when considering your budget. It takes a lot more than that to get a franchise going. You’ll need to think about advertising and marketing costs, labor, and more. Also, ask yourself if you’re prepared to live hand to mouth for a while before the business takes off.
There’s a Franchise Disclosure Document (FDD) that would-be franchisees should have access to. It lists extra working capital you’ll be responsible for, but it usually only looks at three months’ worth of bills. Instead, you should set your budgets for at least six months. Meanwhile, the FTC estimates that it takes about a year to start turning a profit, so you should have enough capital to cover your living expenses for a year and business expenses for at least six months.
Generally, franchise consultants are sales reps who get paid for their efforts. Their main goal is to get you into opening a franchise as soon as they can. This is because they usually get a 50 percent cut of the $20,000 to $30,000 franchise fee. Do your due diligence before speaking to a franchise consultant and be sure to discuss financial agreements with them before signing any dotted lines.
Don’t believe the old urban legend that franchises have only a 5 percent failure rate. According to the 2012 findings of the Small Business Administration, franchises have roughly the same failure rate as other companies, suggesting that two-thirds of companies will fail after two years and only half make it to five. Be wary, as tons of franchisors make faulty claims that franchises are all but guaranteed to succeed while privately owned businesses are far more likely to fail.
Many great resources are at your fingertips that can help guide your franchise in the right direction. If you need help with buying a franchise, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.