Buying a franchise business system can be a savvy financial strategy because you get to use an established brand and its products. According to statistics from the ADP National Employment report, franchise system businesses continue to attract a reliable stream of employees and customers.
The same customers who visit a certain franchise in Texas are apt to visit another in Pennsylvania, or wherever their travels take them. With adaptations for geography, most franchises look and operate the same.
You can buy a franchise for as little as $20,000, but how do you choose the right franchise? Read on.
What Is a Franchise?
In basic terms, a franchise system is an established business. The franchise has an established design and mode of operation. For your investment, you get to capitalize on that familiar look and operation customers already know and trust.
You can do your due diligence researching franchises in the US and internationally (there’s an International Franchise Association).
- READ MORE: See our Franchise Guide
Pros and Cons of Buying a Franchise Business
As a prospective franchise business owner, you have to decide whether or not this type of business structure is for you. Here are some pros and cons to consider as important factors.
- You will own your own business, which comes with the business tools to ease you into operations.
- Your new business opportunity already has brand recognition, which will include a reliable customer base with repeat business.
- It may be easier to get franchise financing, especially when compared to getting financing for a start-up business. Popular franchises will have more financing options.
- Instead of buying land and getting the proper permits, you can buy an existing franchise that an owner is selling.
- Franchises home companies include both initial training and ongoing training to help guarantee success in the franchising industry.
- Operating expenses are known because they are in line with the cost experienced by other franchisees.
- A franchised business comes with its established guidelines and rules for how it is to be operated. There is little room for personal creativity when you’re running a particular franchise.
- You have little control over some of the ongoing costs involved, such as inventory restocking and advertising. Those requirements will be spelled out in the contract prospective franchisees will review.
- Your choice of the franchise to buy may be limited due to how much capital you can provide upfront. You’ll need to provide a minimum of 3 years of financial statements and most likely obtain a small business loan.
- You have strict guidelines for hiring and firing of employees. In other words, there may be a candidate you really like but the applicant doesn’t meet company standards, such as for education.
Steps to Buying a Franchise
As a potential franchisee, you’ve already read about some steps that may be involved in purchasing such small businesses.
Here are some things to research and do as you consider delving into a franchise opportunity.
1. Research franchise opportunities in your chosen area.
2. Request the Franchise Disclosure Document.
3. Find an attorney experienced in franchise law and franchise ownership, and review the disclosure document with the attorney.
4. Get an accurate assessment of your qualifications. For example, most franchise agreements require that the purchaser have a certain amount of net worth. Of course, that varies according to the price of the franchise and the terms of the franchise agreement. In most cases, you must have ready capital for the initial fee, and a certain level of net personal worth.
5. Make a comparison chart of the cost to buy, which will include a flat fee, plus a payment for the loan amount.
6. Many franchise agreements include a royalty fee, which is a fixed percentage of gross sales. That royalty fee can range from 4 to 9%.
7. Network with other franchise owners of the same business – or businesses – that you are considering. Ask them questions, such as the quality of the training they received and the responsiveness of the home company in answering questions or resolving problems.
8. In addition to visiting a franchise and talking with an owner or two, consider a visit to the franchise headquarters/home office.
9. Location, location, location. If you already own a commercial site, is it suitable for the franchise? Will you be able to obtain a suitable commercial site? Is it in an area where there may be too much competition?
- READ MORE: The Myth of the Hottest Franchise
What Franchise Fees and Other Costs Are Involved With Buying a Franchise?
As part of your due diligence, develop a chart where you’ll compare start-up costs, such as the franchise fee, cost of inventory, cost of hiring employees, etc.
Note the percentage of the royalty fee, start-up cost, and royalty fees. It’s important to weigh not only the start-up cost but also the operating costs.
Remember that loan interest rates may be fixed or variable for your new venture. For some smaller franchises, such as mobile or home-based franchises, you should be able to obtain a fixed-rate loan.
Research commercial loans. The Small Business Administration is a great place to start. The Small Business Administration offers several choices for loans and can also direct you to SBA-approved lenders.
Is a Franchise a Good Investment?
Yes. In fact, many franchisees don’t stop with just one. You aren’t limited to how many franchises you can own. After your initial investment, you should receive a steady income from regular customers who trust the brand.
They visit your company because they know what to expect.
Is Owning a Franchise Profitable for Owners?
Yes! That’s why owning a franchise is a top choice for many people who are owning businesses for the first time. Of course, the average annual income varies according to the size and type of the franchise. In other words, a mobile food cart may not generate numbers that compare to a full-course, sit-down restaurant, or a 200-room hotel. But with the smallest franchises, you may be able to get started with just a few thousand dollars.
So, let’s talk about averages. In franchise businesses, the average owner earns (net) between $75,000 and $100,000 per year. For the larger “top” earning ones, an owner may earn $200,000 a year or more.
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