How to Buy a Franchise

Purchasing a franchise is one of the best ways to step into the business world without taking as many risks associated with other business models. Are you considering buying a franchise but aren’t sure where to start? You have come to the right place!

In this article, I will discuss everything you need to know when it comes to becoming a franchise owner, from researching new franchises to securing funding and signing the franchise agreement I have got you covered.

Key Takeaways

• Research and choose a franchise that aligns with your interests, skills, and financial capacity. Consider industry, location, and the franchisor’s reputation.
• Understand all financial requirements, including initial franchise fees, ongoing royalties, advertising contributions, and operational expenses.
• Review the Franchise Disclosure Document (FDD) carefully to assess the franchisor’s financial health, obligations, and legal history before committing.
• Secure financing through options like traditional business loans, SBA loans, or franchisor-backed financing programs.
• Attend the franchisor’s training and support programs to ensure you understand the business model and operational processes.
• Conduct due diligence by speaking with current and former franchisees to gain insights into real-world experiences and potential challenges.

How to Buy a Franchise: Step-by-Step Guide to Becoming a Franchisee

Franchises are one of the most popular business models in the USA. In fact, according to a 2023 report, there are more than 800,000 franchise establishments in the USA. because they are relatively easy to start and come with less risk than traditional businesses. But this doesn’t mean buying and setting up a new franchise will be a walk in the park. Let’s take an in-depth look at how to buy your first franchise.

1. Brush Up on Your Understanding of How Franchises Work  

Before you dive head first into buying a franchise, you should make sure you fully understand everything there is to know about franchises. You are going to own one, after all, so it is important to have a grasp on what franchise ownership entails.

In simple terms, a franchise is a business model where you, the franchisee, operate a business using the brand, systems, and support of an established company or the franchisor. In exchange, you typically pay an initial fee and ongoing royalties. The franchisor provides training, marketing, and a blueprint for running the business. In many cases, the franchisor will also provide some financial assistance. 

Essentially, when you buy a franchise, you purchase the right to operate a branch of an existing business, which significantly increases your chances of success. 

2. Research Franchises with Franzy

Finding the right industry to buy into can be a difficult task, let alone the best franchise. Buying a franchise is not a decision that should be taken lightly, which is why I urge you to do your research and make as informed of a decision as possible.

Franzy aims to make this step of the process easier. The platform simplifies the research phase of purchasing a franchise and will connect you with a massive pool of franchises in every industry under the sun (not just the most common industries). This allows you to make data-driven decisions, locate emerging franchises in your area, and connect with brands you otherwise wouldn’t have the chance to.

3. Read Through the Franchise Disclosure Document (FDD)

An FDD is a legal document that franchisors must provide to potential franchisees at least 14 days before signing an agreement. It contains essential information about the franchise, including the business’s financial performance, fees, obligations, and the franchisor’s history, all of which are aimed at helping prospective owners make informed, data-driven decisions.

I won’t beat around the bush here: FDDs are very dense documents, generally ranging between 200 and 400 pages long. That said, I highly recommend that you thoroughly read the entire document. As they are also typically loaded with a lot of legal jargon, it is also smart to have your lawyer look at the FDD to ensure there are no “red flags.”

4. Do Your Due Diligence

Have you landed on a franchise that looks like a great option? Before pulling the trigger and shelling out your money, you should do some further digging to make sure the franchise in question is a good fit for you. Every franchise operates differently, so it is always a good idea to make sure that your expectations are in line with the reality of what owning the specific franchise will look like. 

 Here are some important things to check before you buy a franchise:

• Reviews from other franchisees: As with most other purchases, reviews are one of the best places to check before purchasing a franchise. Reviews can provide you with invaluable insight into what the day-to-day operations are like, what challenges franchisees face, and what kind of support to expect from the franchisor. You should also ask franchisees pointed questions to find out more information about a “day in the life” of running the business.
• Performance and financial metrics: You’ll obviously want to know how well other franchisees are doing and how much money they are making in sales. You can generally find this financial information in the FDD.
• Required qualifications: Many businesses set specific requirements that prospective franchisees must meet to buy a franchise. These requirements vary drastically but may include a minimum credit score, net worth, previous industry experience, and management certifications.
• SWOT analysis: Conduct a franchise SWOT analysis to understand every strength, weakness, opportunity, and threat associated with buying a particular franchise.

5. Create a Business Plan

Business plans are an essential step in starting any business, which includes franchises. In fact, many franchisors will require prospective franchisees to provide a business plan before signing the franchise agreement. Additionally, you’ll need a business plan to receive financing, such as bank loans, to fund the new franchise. A well-crafted business plan not only demonstrates your commitment and understanding of the operational structure of the franchise but also serves as a roadmap for your success. 

6. Meet with the Franchisor

Now that you have landed on a franchise to buy and created your business plan, it’s time to get the ball rolling and meet with the franchisor to discuss the next steps. This can either be done virtually or in an in-person meeting. You can think of this meeting as an interview in which the franchisor will ask questions and review your credentials to ensure you are a good fit for the brand. This is also a good opportunity for you to ask any questions you may have and make sure you are 100% clear on everything included in the FDD.

7. Fund Your Franchise

Franchises come with quite a few out-of-pocket expenses, so most franchisees need to secure financing to cover the initial fees and startup costs. The good news is that quite a few options are available for funding your new franchise. Additionally, since franchises tend to be viewed as less risky than other businesses, franchisees generally have an easier time securing funding than other entrepreneurs. Having a strong business plan will come in handy here, as well as a high credit score and personal assets that can be used as collateral for loans.

So, what are your financing options as a new franchise owner?

• In-house funding through franchisor: Often, the best way to get funding for a new franchise is directly through the parent corporation. The parent company may either directly lend you money or (more likely) they will partner with a bank or lender.
• Standard bank loans: If you have a good credit score and have a detailed business plan, you may be able to receive a bank loan to fund your franchise. Bank loans tend to have relatively low interest rates and offer longer repayment timeframes compared to other financing options.
• SBA Loans: The U.S. Small Business Association offers a couple of different types of federal loans to small businesses. These loans have a longer approval process than standard bank loans but tend to have lower interest rates and are a great choice for getting higher loan amounts.
• Personal financing: Another way to fund your franchise is with your own savings or retirement funds. This obviously comes at a higher risk since you are putting your personal assets on the line, but it is an option. Some franchisees will use the Rollover as Business Startup (ROBS) program to withdraw funds from their retirement savings, such as 401k or IRA, without receiving fees.
• Friends and family: If you don’t have the necessary funds to finance yourself, you can also consider asking your friends and family for personal loans. This is a good option, especially when asking for only small amounts, but tread carefully, as borrowing money from loved ones is a slippery slope that can quickly lead to conflict.

8. Choose a Location for Your New Franchise

Before you finalize the agreement and buy a franchise, you need to choose a physical location for the business. Determining the location of your new franchise is a crucial driver of success. The right location can significantly boost your chances of attracting customers, while choosing a poor location may set you up for failure right from the start. Of course, the cost of rent is one of the most important figures to look at when choosing a location, but you should also consider other factors such as local demographics, foot traffic, visibility, and competition in the area.

For instance, if you’re opening a family-friendly restaurant, choosing a location in an area with high foot traffic, near schools or residential neighborhoods with young families, would be ideal. A location with lots of visibility and easy access will naturally draw in more potential customers.

On the other hand, opening that same restaurant in an industrial zone or an area with low residential activity would not be a smart move. Even if rent is cheaper, the lack of foot traffic and a customer base that doesn’t align with your business could lead to low sales and slow growth.

9. Sign the Franchise Agreement

Once you’ve made a solid plan for your franchise, secured funding, and reviewed the FDD, it is time to fill out the paperwork and get started on your new business venture. The Franchise Agreement is a legally binding document that breaks down the details of the agreement between you (the franchisee) and the franchisor. 

This agreement will typically include things like:

• Franchise fees
• Royalty payments
• Duration of the agreement
• Territory rights
• Operational standards
• Support the franchisor will provide (such as training or marketing assistance)
• Information about renewal and termination conditions
• Operational restrictions
• Insurance requirements

Just as with the FDD, I urge you to thoroughly read through the Franchise Agreement. While the fine print may be tedious, it is a legally binding document, so it is important that you fully understand the Ts and Cs.

10. Pay the Franchise Fees

After signing the franchise agreement, the final step is to pay the franchise fee. A franchise fee is the amount of money you are required to pay to gain the right to operate the franchise. This is not to be confused with royalty fees, which are ongoing cuts of the gross sales that you’ll pay to the franchisor.

Once you’ve paid the franchise fee, you will officially be the owner of a franchise. Congratulations!

Next Steps: Get Your Franchise Set Up

Buying a franchise is only the first step of the process. Once you are officially a franchisee, it is time for the “real work” to begin. Let’s look at some of the next steps for getting your new franchise up and running.

• Secure necessary business licenses and permits: Before you can officially open your doors, you’ll need to make sure your franchise is operating legally. Obtain all required business licenses and permits. The specific permits and licenses you’ll need will vary depending on your industry and location.
• Hire employees: Recruiting the right staff is a great way to set up your franchise for success from day one. Put some effort into the hiring process and look for staff with prior experience in the industry. Additionally, prioritize training and onboarding to ensure new hires understand the franchise’s standards and culture. 
• Attend corporate training: Many franchises offer training sessions for new franchisees to learn the company’s culture and operational processes. While these training sessions are not always mandatory, I highly recommend attending as they will provide you will the necessary skills and resources to run the franchise.
• Set up suppliers and purchase inventory: You’ll need to ensure that your inventory meets the franchisor’s standards and complies with your Franchise Agreement. That said, many franchisors manage the supply chain directly or will provide you with a pre-approved list to maintain brand consistency.
• Invest in business insurance: Most franchisors will require you to purchase some level of business insurance. At the very least, you will likely need commercial property coverage, general liability insurance, workers’ compensation, and business interruption insurance.

Pros and Cons of Buying a Franchise

When done properly, buying a franchise can be an excellent decision that could change your life. But that isn’t to say that franchises don’t have their downsides. Here are some pros and cons of buying a franchise.

Pros

• Less risky than other business models: Since you are essentially buying into a pre-established company, franchise owners have a higher chance of success than many other business owners. In fact, some studies show that more than 80% of franchise owners are still in business after 5 years, which is much higher than the general small business average.
• Immediate brand recognition: The most obvious benefit of buying a franchise is that you gain the right to operate a trusted brand. For example, Dunkin Donuts is an incredibly popular and recognizable franchise. If you were to purchase a Dunkin Donuts franchise, you’d likely have an immediate customer base from the day you open your doors.
• Financing is generally easier to secure: This is not to say that funding a franchise is easy by any means, but generally, franchise owners have an easier time receiving bank loans than other business owners. This is because franchises are seen as lower risk and tend to make profits quicker than standard small businesses.
• Support from the parent company: Many franchisors will support new franchisees throughout the process of opening the franchise. You may receive support for things like training staff, locating suppliers, finding a location, and even marketing.

Cons

• Less flexibility and freedom: Owning a franchise may not be for you if you want creative freedom and flexibility when it comes to making business decisions. One of the main downsides of franchises over other business models is that you’ll have less control over the business as you must stick to specific corporate criteria and procedures.
• High startup costs: While securing funding can be easier with franchises, this business model does come with some hefty startup costs and ongoing fees. Not only will you need to pay the initial franchise fee, but you’ll also have to make a downpayment on a property, purchase equipment and insurance, hire staff, and invest in advertising.
• Ongoing fees: To run a franchise, you must also pay the franchisor royalty payments, which generally range between 4% and 12% of your profits.
• Contracts are not permanent: When you sign a Franchise Agreement, you’ll gain the right to operate the franchise for a predetermined period of time (generally between 5 and 20 years). If you want to continue operating the franchise after this period ends, you’ll have to sign another agreement and pay an additional franchise fee.

Responsibilities of Franchise Owners

As a franchisee, you are responsible for all of your franchise’s daily operations. You’ll handle all aspects of the franchise, from hiring staff to marketing, budgeting, and growth. Franchisees are the drivers behind the success of a franchise, making critical decisions that directly impact performance and customer satisfaction.

In addition to managing the basic operations of the business, you must ensure that your franchise complies with the franchisor’s established standards and guidelines, such as maintaining quality control and implementing any new policies or changes introduced by the franchisor.

You’ll also be the direct link between your franchise and the parent corporation. This may involve attending corporate meetings or training sessions and implementing policy changes or new procedures.

Important Things to Consider Before Buying a Franchise

Ready to buy your first franchise? Here are some important things to consider before you start on the journey to franchise ownership.

• Is there a solid market demand?
• How long has the franchise been in business, and what is its growth trajectory?
• Does the franchise have a good brand reputation?
• How much does the franchise cost to run?
• Is the franchise fee fair for the value of the company?
• How much support will you receive?
• What is the length of the franchise agreement, and what are the renewal terms?
• How flexible is the franchise model in adapting to local market conditions?
• How satisfied are current franchisees, and what do they say about their experiences?
• Is there a clear path for growth and expansion within the franchise system?

Things to Avoid as a New Franchise Owner

Every franchisee is bound to make mistakes—I know I did! That said, to give you a head start, here are some final pieces of advice on what to avoid after purchasing your first franchise.

Ignoring the Franchise’s Proven Business Model

Chances are, you are buying a franchise because the parent company has been extremely successful. So, it makes sense to follow their business model and advice, at least to a certain extent. After all, the franchisor’s business system has been tested, tweaked, and improved over time. While there are certain aspects of the business model that you can (and should!) tweak according to your specific market and location, following the franchise’s proven system is your best pathway toward success.

Underestimating Local Marketing 

It is easy to assume that the franchisor’s national or regional marketing campaigns are enough to attract a steady stream of local customers. But don’t make this mistake! While these larger campaigns build brand recognition, they don’t always speak directly to the unique needs of your community. Local marketing campaigns are a great way to spread the word about your franchise and engage with your customer base. This is an especially helpful strategy when you first launch your new franchise.

Beyond simply marketing your new franchise to your local audience, you should also build relationships with your customer base.

Skipping the Training Materials

My number one tip to new franchise owners is not to snooze on training. Even if you have loads of industry experience, the franchise’s training sessions can provide a ton of value and advice on running the business. Missing out on these training sessions can lead to knowledge gaps that could make it more difficult to succeed.

Expanding Too Quickly

The ultimate goal for every franchisee is to grow the business, expand, and possibly even purchase more franchises to form a franchise empire. While it is totally fine to shoot the moon with your aspirations, don’t rush it. 

Additionally, setting unrealistic expectations for growth can set you up for disappointment and stress. Many new franchise owners envision rapid success, expecting to see a high return on investment within months of opening. However, franchises often take time to build momentum, especially as you establish your brand in the local market. Allow yourself to settle into the new franchise before expanding. Build a strong foundation and grow your franchise in a steady and stable way. This way, when it is time to expand and open new locations, you have a strong backbone to support growth.

Ready to Make Your First Steps Towards Franchise Ownership? 

As you can see, buying a franchise is a multi-step process that requires a good amount of planning and thought. To set yourself up for success, you’ll need to do a lot of research and due diligence to ensure that the franchise you buy is a good choice. Franzy streamlines this process, making it exponentially easier to connect with franchises and make data-driven decisions. If you are ready to get started on the journey of buying a franchise, Franzy is the ultimate tool to help you along the way.