I Want to Buy a Franchise: Everything You Need to Know
I want to buy a franchise! If this is a thought you have, you will need to pay an initial fee and royalties.3 min read
2. Franchise vs. Business Opportunity
3. Associated Costs
4. Franchise Law
5. How to Buy a Franchise
I want to buy a franchise! If this is a thought you have, you will need to pay an initial fee and royalties. Once you do, you'll gain access to a trademark and support from the franchisor.
When it comes to owning a franchise, you pay an initial fee and ongoing royalties to a franchisor. As a result, you can use a trademark, receive support from the franchisor, and have the rights to use the franchisor's way of doing business, whether it involves selling products or services.
Buying a franchise gives you other advantages than if you started a business from scratch. One of the most significant advantages is obtaining an operation system that works, along with training on how to use it.
Franchise vs. Business Opportunity
Franchises have more structure when compared to business opportunities. Oftentimes, a business opportunity includes a package of goods that lets a purchaser begin a business and a seller create a marketing or sales plan. Other factors to consider include the following:
- A business opportunity doesn't have a seller's trademark since the buyer operates under his or her own name.
- Business opportunities are less expensive and don't charge royalty fees.
- Many business opportunities don't consist of a continuing relationship between seller and buyer.
When it comes to the capital investment, use the franchise fee to determine the profitability of the business. Most companies use a scale to determine fees, and they can range anywhere between $2,000 to more than $100,000. This front-end franchise fee is a one-time payment that the franchisor charges for the use of the business concept, learning the business, and attending a training session. There's also an ongoing royalty fee, which ranges from two to 10 percent or is a monthly figure.
Other associated costs include:
- Facility fee. You might need to purchase land or rent a building.
- Equipment. Many businesses require various pieces of equipment.
- Signs. Some franchisors include a sign package the franchisee must purchase.
- Opening inventory. This typically includes a two-week supply of goods.
- Working capital. This might include money in the cash drawer to make change or to pay employees.
- Advertising fees. You might have to pay an advertising fee for regional or national coverage.
The Franchise Rule established by the Federal Trade Commission (FTC) protects you when you buy a franchise. This rule makes franchisors give full disclosure about everything a prospective franchisee needs to make a decision to invest or not. The disclosure must occur at the first contact when they discuss buying a franchise as well as at least 10 days before signing a contract.
This cooling-off period gives the franchisee a chance to review the information before officially agreeing. In addition, the franchisor must present a disclosure document called the Franchise Disclosure Document (FDD), which has detailed information about the franchise.
How to Buy a Franchise
If you're looking to purchase a franchise, consider the following:
- Research possible franchise opportunities. You want to find the right franchise based upon your qualifications, budget, and interests. Research the franchise requirements and conduct a self analysis to determine your own skills and interests.
- Reach out to franchisors for an application and FDDs. Narrow down your options to one or two, and fill out applications. You can set up a meeting with the franchisor's representative to obtain a copy of the FDD.
- Meet with the franchisor's management team. Plan a visit on Franchisor's Day, where you can ask questions about the business' success.
- Review the franchise agreement. Since this acts as the formal contract, the agreement gives you a legal right to own and operate the franchise. Have a lawyer look over the contract.
- Secure financing. After you pay the franchising fee, there are other payments you must make. There are several financing options available, including Rollover for Business Startups (ROBS), SBA loan, a bank loan, and financing directly from franchisor.
- Select a location. You need a place to operate your business if it's not home-based or mobile. Franchisors or commercial real estate agents can help you with this task.
- Undergo necessary training and workshops. The franchisor usually provides the training sessions, which typically last for one or two weeks.
- Get ready for the grand opening. The franchisor might help with the actual opening, including assisting with the promoting and marketing, to make sure you increase your customer base.
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.