Franchising is considered a favored business model among entrepreneurs because it provides many of the benefits of business ownership, such as freedom and virtually unlimited potential for success, while also offering a proven system, recognized brand, and ongoing support from the parent company. For these reasons and many others, franchising is rapidly expanding: as of 2018, there are 745,290 franchise establishments operating in the U.S. across a wide variety of industries, and Americans spend an estimated one out of every seven dollars at a franchise business. Therefore, buying a franchise offers a lucrative opportunity for aspiring entrepreneurs—but with so many options available, choosing the right one can be an overwhelming process.
Are you thinking about buying a franchise, but are unsure where to start? With nearly 4,000 to choose from, the following steps will help guide you to a fulfilling and profitable franchise opportunity.
Conduct a thorough personal assessment
Before you begin researching the franchise opportunities available to you, it is crucial to have an honest, comprehensive understanding of your personal characteristics. Specifically, consider the following factors:
- Your financial situation. For many people, buying a franchise is one of the largest purchases they will ever make, next to their home. Therefore, it is important to take a thorough accounting of your current income (if any), savings and other assets, options for financing, and personal tolerance for risk. It is also helpful to have realistic expectations about what buying a franchise will cost. While you may hear about franchises that only require a small initial investment of a few thousand dollars, these businesses generally are not very reputable and may be using a bait-and-switch scheme to lure investors. In reality, established franchises that offer a sound investment opportunity typically carry upfront costs ranging from $80,000 to over $1 million, with the exact amount varying based on factors like the industry and number of locations. In addition, you will need enough of a financial “cushion” to meet your needs until your business begins generating a positive cash flow. Fortunately, there are numerous options available to help finance your investment, and working with an experienced franchise consultant can ensure that you take advantage of the best funding solutions.
- Your strengths, weaknesses, and preferences. Do you like to work directly with customers? Are you comfortable with training, managing, and disciplining employees? Would you prefer more freedom or more guidance from the franchisor? With so many different types of franchises available, there is likely a suitable opportunity for you, regardless of your answers to these questions. Being honest with yourself about your skills will help to ensure your future success and satisfaction as a franchise owner.
- Your goals. Consider your main motivation for buying a franchise. Are you seeking greater freedom and work-life balance? Do you aspire to eventually build a “franchise empire” with multiple units? Would you like to sell the business after a few years, or pass it onto your children? Questions like these are important because some franchisors impose restrictions on how franchisees may operate or transfer their businesses. Additionally, consider what role you would like to play in your franchise—are you open to hands-on involvement in the day-to-day business operations, or would you prefer a more semi-absentee ownership arrangement where you manage a manager who runs the day-to-day?
Consider which types of franchises may be right for you
Once you have assessed your personal characteristics and goals for franchise ownership, the next step is to begin researching various franchise opportunities. As you hone your search, consider the long-term trajectories of different industries. Which industries are likely to grow as societal demands evolve, and which may be susceptible to fizzling out—even if they are currently booming? While these trends may be difficult to discern and, as with any investment, trying to predict the future success of industry involves some degree of risk, taking a logical approach when buying a franchise—rather than simply being lured by the latest fad—will help you achieve lasting success as a business owner.
Another factor to consider is which types of businesses you would be proud to represent. Some people are deterred by the word “franchise” because they automatically think of fast-food chains and other lower-end businesses. While many of these chains are indeed franchises, the franchise world encompasses countless businesses that provide goods and services at various price points to a diverse array of customers. Therefore, if you are wary of being affiliated with, for example, a fast-food restaurant, there are still numerous other franchise opportunities available to you. For instance, franchises include businesses ranging from pet or child care to home or office maintenance to professional services, like tax preparation or career coaching. Keep an open mind as you explore different possibilities, but ensure that you would feel proud serving as a “brand champion” for whichever franchise you choose.
Investigate buying a franchise in a specific brand
Once you have developed a list of franchises that may be a good fit for you, it is time to begin conducting due diligence on each company you are considering. Two main sources will provide vital information: current franchisees, and the Franchise Disclosure Document (FDD).
The Federal Trade Commission requires franchisors to provide prospective franchisees with a copy of the FDD at least 14 days before a contract is signed. This document contains invaluable information about the franchise parent company, the relationship between the franchisor and franchisees, and several other factors that may help you decide whether to invest in the company. When reviewing the FDD, pay particularly close attention to the sections that discuss initial and ongoing fees, rules and restrictions by which franchisees must abide, as well as obligations the franchisor must provide to you as their business partner, past and current litigation involving the company, the financial performance representations (if provided), and turnover among franchisees.
The FDD should also contain the names and contact information of current franchisees within the system. Interviewing these individuals once you have gained permission about their experiences with the company may offer candid information to help you decide on the right company when buying a franchise. Examples of questions to ask franchisees include:
- What struggles have they faced?
- How are their profit margins? Have they encountered any unexpected costs?
- What types of marketing or advertising services does the franchisor provide, and what is the cost to franchisees? Do these services yield a strong return on investment for franchisees?
- What is the company’s long-term growth strategy?
- What is the company culture like? For example, is there a great deal of oversight from the franchisor, or are franchisees granted more autonomy? Do interactions tend to be more formal or relaxed?
As you learn more about specific franchises, ensure that each opportunity you are considering aligns with your personal characteristics and goals. The most effective way to find the right fit when buying a franchise is to work with an experienced franchise consultant. At Franchise Logic, we will equip you with the most relevant, up-to-date franchise information and work closely with you to find a match for your personal goals and attributes. We can identify opportunities that you may never have considered or been able to find through independent research.
Ready to start the process of determining if buying a franchise is right for you? Are you ready to invest in an exciting and lucrative franchise? Call Franchise Logic today at 303.805.5078 to schedule a FREE, 15-minute initial discussion!