The Complete Guide to Buying a Franchise

Franchises provide a proven business model but can require significant upfront costs.
Randa Kriss
By Randa Kriss 
Edited by Robert Beaupre

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Unlike creating your own business, franchisees pay a royalty and initial fee for the right to operate under a franchisor's established brand and business model. Buying a franchise, therefore, can be an advantageous way to start a business, but you'll typically need a large upfront investment to get off the ground.

Here's what you need to know to buy and open your own franchise.

What you should know about buying a franchise

Before getting started, you should think carefully to make sure buying a franchise is the best business decision for you. Like any opportunity, there are both pros and cons to franchising. Here are a few things to consider:

Pros

  • You have an existing corporate framework in which to work.

  • Your brand and operating procedures are already established.

  • The franchise has an existing customer base.

  • The greater marketing plan generally comes directly from the franchise's corporate headquarters.

  • You'll receive training from corporate headquarters before opening your franchise.

Cons

  • You'll have to contribute capital upfront. Many franchisors have net worth and/or available capital requirements.

  • There's a lack of flexibility within the business, which can be stifling for some entrepreneurs.

  • You'll always have to pay some form of franchise fees to the franchisor.

How to buy a franchise

If you've decided that opening a franchise is right for you, you can follow these steps to make it happen.

1. Research and choose your franchise

There are a variety of types of franchises to choose from, so you'll want to start researching to find the one that aligns best with your interests, goals and budget.

As you compare your options, you can consider:

Industry and location

You can begin to narrow your search by choosing an industry or sector that excites you and fits with your interests and skills. For instance, consider food, beauty, home services, real estate, hospitality and fitness — and then take a look at franchise opportunities within the area that interests you most.

You should also keep your location in mind: Even if you’re interested in a certain franchise, not every company will have opportunities in your area.

Upfront costs and ongoing fees

Buying and opening a franchise can be expensive. You'll want to think about your personal budget and net worth and what type of franchise you might be able to afford.

As you might expect, certain franchises are more expensive to start than others — and you may need a larger investment if you're opening a location in a popular market, like a large city. Startup franchise costs can range anywhere from $20,000 to $1 million, depending on the brand and real estate requirements.

You can generally find some information on upfront costs on a company’s franchise website, but you’ll want to contact the company (there’s usually a form or an email) expressing interest to get a better sense of the specific costs involved.

You'll also want to find out the cost of the royalty fees. These will be contained in the franchise disclosure document, or FDD.

As you’re going through your FDD, be thorough in your research. Ask questions to clarify anything that isn’t explicit. And make sure you have a full sense of the costs involved — franchises often require investment in areas such as marketing and promotion, signage, inventory and ongoing costs that are substantial, but not always emphasized.

Qualifications

Many franchises will require certain personal qualifications in order to consider you as a franchisee. These can include your personal finances, such as net worth, available capital and credit score, as well as industry and management experience.

You should consult a franchise's website or contact the company directly about any of these requirements. You'll want to make sure you can meet the qualifications — and are willing to make the necessary investment — before moving forward.

Franchise reviews and personal experience

You can use websites like the Better Business Bureau and Franchise Business Review to read reviews and comments from franchisees to get a sense of their experiences.

For a more personal experience, you can try to attend a "discovery day" with the franchise you're interested in buying.

These discovery days allow you to spend time at the corporate headquarters or in an existing franchise location. They will give you a sense of operations, corporate culture, requirements and what your day-to-day will be like. A discovery day can also be an opportunity for you to make a good first impression with the franchisor.

If you're not sure the franchise is a good fit after the discovery day, listen to your instincts — there are many profitable franchise opportunities available — and you don't want to invest in a business that isn't right for you.

2. Determine how to finance your franchise

Once you've identified a franchise that you want to move forward with, you'll need to figure out how you're going to finance your business.

You'll need to evaluate all of your startup costs — opening expenses, ongoing costs, franchise fees, royalty fees, real estate fees, etc. If you don't have a location yet, you'll want to estimate what you think real estate might cost you.

Because franchises require such a large upfront investment, most franchisees don't have the ability to finance the entire business themselves. Luckily, there are a range of options for franchise financing that can help you access the capital you need to buy and run your business:

  • Equipment financing. A popular type of financing for those opening franchises is equipment financing. This type of loan enables you to get capital for the purchase of gear you may need to get your store up and running. This could be for something as large as a commercial oven, or as small as a ballet barre.

  • Business term loans. These “traditional” business loans enable entrepreneurs to access lump sums of capital to spend as they’d like on their business. Generally, business term loans have terms of about three to five years and require monthly repayments.

  • Business line of credit. A business line of credit provides the ability to access capital incrementally as you need it. That could include large purchases that equal your entire credit line, or smaller expenses such as marketing that only require a little capital outlay. Because these loans are “revolving,” you’ll have access to the full amount of capital again once it’s repaid, and you might find that having access to this financing could be helpful for expenses down the line.

  • SBA loans. Guaranteed by the U.S. Small Business Administration, SBA loans have competitive interest rates and long repayment terms. There are the very popular SBA 7(a) loans, which provide business owners with working capital to make purchases they need. There are also SBA 504/CDC loans, which are meant to finance large fixed assets such as real estate. It’s important to note that these loans can be hard to qualify for, and likely won’t be available to those who are taking their first stab at running a business. If you have a successful track record, though, you’ll want to explore them.

3. Scout a location

A location is a prime part of opening a franchise — and succeeding. You’ll want to consider whether you’re renting a space or buying a building (though most owners rent, at least in the beginning). Of course, you also have the option to run your business from home if you’re not client-facing.

Consider these three important factors when selecting a location:

  • Your surroundings. Is there a “retail row” in your town? Are there certain businesses that attract a clientele that would be your ideal customer? Consider potential opportunities in these neighborhoods or areas. Of course, you’ll want to consider competition, too — being too close could work to your disadvantage.

  • Foot traffic. Is the area you want to open well-known as an area in which franchises like yours can get customers in the door? You can always try to measure foot traffic by taking a manual count of people who go to stores in the area for a few hours.

  • Accessibility. Is your prospective location near public transit, or is there ample parking? Remember that accessing your franchise is part of the customer experience.

Note that you might want to finalize your location before you seek financing; some franchises may require you to.

4. Review and sign your franchise agreement

Your formal contract is called the franchise agreement, and it’s a document you should review carefully. This is a binding document that lists your fees, obligations and more. If you have any questions, now is the time to ask them.

It’s also the time to clear up any discrepancies between any verbal agreements you’ve made with headquarters versus what’s stated in your contract. If there’s a dispute, what’s in writing will prevail.

This is also a document that your lawyer should review. (And, if you don’t yet have a startup lawyer, now’s the time to engage one.)

5. Attend corporate training

It’s very likely that you’ll have to attend regional or national training to become an expert and get your franchise up and running. Some companies also offer virtual training. These sessions vary in length and sometimes involve your employees.

Understand, too, that you’ll likely have to perform ongoing training, including training on new products and technologies, and brushing up on management skills and techniques.

6. Open your doors

If it feels like you’ve done a lot to open a franchise — well, you have. Once it’s time to open your doors, keep a watchful eye on how things are going, but don’t forget to celebrate, too.

Depending on the franchise you’re a part of, you may be able to enjoy ongoing mentoring and training from the franchisor, making you a more savvy business owner in the years to come.

This article originally appeared on JustBusiness, a subsidiary of NerdWallet.