If you’re interested in starting a business but don’t have the bandwidth to start from scratch, franchising is an alluring option. There are franchises across 300 business categories, including many of the world’s most well-known brands.
You’re likely familiar with the concept of franchising, where major businesses allow others to use their brand and business framework. Franchisors benefit by expanding their brand recognition and earning potential; franchisees get to run a business without the hassle of building a company from the ground up.
There are many benefits of franchising. But it’s not as simple as walking into a McDonald’s, waving some cash, and saying, “I’ll buy it!” Here, we’ll explain the basics of what franchising is, why it can be a smart business move, and how to get started.
What is Franchising?
In a franchise agreement, the franchisor retains ownership of the business, while the franchisee leases the right to sell the contents of that business using the same name and model.
As a franchisee, you are subject to the franchisor’s operating rules and regulations, from quality control methods to hiring and service standards. When you become a franchisee, most companies provide extensive training to ensure you operate the franchise similar to every other franchised store.
To retain the rights to the franchisor’s goods or services, and to benefit from the brand reach, franchisees must pay certain fees, as well as maintain and protect the quality of the brand.
Why You Should Buy a Franchise
Franchising offers entrepreneurs a few major advantages.
Brand Strength
Think of how often you see restaurant ads on television or in your day to day life. Most of those restaurants thrive on a franchise model. Franchisees pay advertising fees to franchisors, yes, but they reap the rewards of that advertising.
Operational Support
Training programs from good franchise companies are like a concentrated business education. These companies know how to run and build a business, so their training can be an invaluable resource.
Franchisors also provide staff dedicated to helping franchisees so you can always talk to experienced people whenever you encounter a problem. While you’re in charge of the franchise, you always have the support and backing of a much larger organization.
That support is especially handy when it comes to things like construction, real estate, and marketing. Most franchises perform market research to help you find the best site for a new location and negotiate the best deal. Likewise, if you have to build a franchise from scratch, the franchisor’s resources can help you find the right contractors at the best prices. And, again, franchisees benefit from the reach of franchisor marketing initiatives, proven tools, and strategies to attract customers.
Less Risk
Though “The Stat” that 90% of franchise businesses succeed is a myth, the fact that it gained prominence at all is a testament to the relative security of franchising. Franchises give you a better chance at success because so much of the infrastructure to start a business is already in place. Of course, there are still risks, it’s just substantially less than starting from scratch.
Between the brand strength and considerable support you receive from the franchisor, you should be able to start things off on the right foot.
How to Buy a Franchise
There are many ways to buy a franchise. Every franchised organization has different rules and different processes for evaluating and approving franchisees, but there are some things that you should do regardless of what you’d like to buy.
Talk to a Franchise Owner
The best way to learn about franchising with a certain organization is by talking to a franchise owner. Not only can franchise owners help you decide what franchise you want to buy into, but they can tell you what does and doesn’t work.
Evaluate Financing Options
Franchises range in initial cost and fee requirements. Research franchise costs and take an earnest look at your finances. Remember that the fees don’t stop after the initial upfront cost.
There are several financing options available for franchisees if you don’t have the cash on hand:
- SBA loans: Small Business Administration loan programs partially guarantee loans disbursed by SBA-approved lenders, giving you low interest rates and longer repayment terms. Some SBA loans are franchise-specific, so it’s worth researching if your desired franchise is in the SBA-approved directory.
- Franchisor financing: Some franchisors offer loans, contributions on down payments, or fee reductions.
- Lines of credit: Business lines of credit or business credit cards offer revolving credit so you only pay interest on what you’ve spent, allowing you to draw on these credit lines repeatedly.
Consult Your Lawyer or Accountant
Entering into a franchise agreement comes with a lot of legal and financial paperwork. Once you’ve done your research and feel ready to purchase, it’s time for a reality check. It’s an exciting process, but you need an impartial lawyer or accountant to protect yourself.
Speaking with an accountant can help you understand franchisors’ financial documents, compare franchisor programs and benefits, and find the right match for your financial health. Additionally, an accountant can help you draw up a business plan for your franchise and navigate the tax and financial issues.
When it comes to consulting a lawyer, talk to someone who specializes in franchise law to ensure you understand all of the terms and conditions. You should be completely familiar with a franchisor’s Franchise Disclosure Documents (FDD), which a lawyer will help you parse.
The Bottom Line
Franchising can be an excellent business opportunity for entrepreneurial people who aren’t ready to start their businesses. There are risks, but also many benefits to franchising. Before you dive in, however, take the time to do your research, consult professionals, and find the best franchise match for your interests and finances.