- Franchisees should look for a supportive franchisor to purchase from.
- Owning a franchise is a long-term commitment, so pursue a business that will still interest you in the future.
- For each of your prospective companies, you should research the processes involved in franchising, ongoing support, and the terms of the franchising deal to help you make your decision.
- This article is for entrepreneurs who are thinking about buying a franchise but unsure which one is right for them.
If you're looking to start a new business, franchising could be a good option. There are franchises in almost every industry, so you have a wide variety of options. So, how do you narrow it down and ultimately decide on the best one for you?
With a franchise, you get the benefit of a proven product or service while still being your own boss. However, you still have to put in the effort, so it's important to find a good fit for your passion and skill set. There are many factors to consider, such as franchise costs and support from the corporate headquarters.
Top questions to ask when choosing a franchise
If you have no idea where to start, begin by asking yourself these questions, which will place some parameters on your franchise search.
What are my personal goals?
Everyone has different motivations for becoming an entrepreneur. Before you think about starting a business or buying a franchise, ask yourself what your goals are. Do you want to make money, spend more time at home, or take an entrepreneurial step in your career?
When you determine your personal goals, it's easier to decide whether a franchise is a good fit to help you achieve those objectives.
What type of industry do I want to conduct business in?
Franchises aren't limited to fast-food restaurants and coffee shops. This business structure exists in virtually every product or service category. You can operate a franchise in tutoring or college prep, janitorial or cleaning services, restaurants and retail, health and wellness, and many other categories.
What are my strengths?
The most successful franchise owners do the work that suits them and look for ways to delegate or outsource the functions that they may not be good at or have the time to do. It's not necessary to be an expert in everything. Don't be afraid to delegate tasks to employees or even outside companies that manage things such as accounting or bookkeeping. [Related: How to Perform a SWOT Analysis]
What role do I want to play in the business?
There are two types of franchisees: absentee owners, who hire staff to manage the business on a day-to-day basis, and owner/operators, who are directly involved in running the business. Before looking into buying a franchise, determine what you see yourself doing daily. Different franchisors offer various opportunities: Some offer specific, hands-on jobs, while others present management possibilities. It's important to know which one works best for you before entering into a deal with a franchise.
What kind of commitment do I want to make?
Many franchise agreements are multiyear contracts. While some are as short as five years or as long as 25 years, the average length of a franchise agreement is 10 years. This means you are committing to this opportunity for the long haul, as it can be difficult to exit a franchise agreement.
What is my investment budget?
Franchise costs vary greatly by industry and business model. While some upfront fees are less than $10,000, others are upward of $1 million. Before buying into a franchise, you should weigh the initial investment against your expected return, along with your income, lifestyle and equity goals. You need to determine how much you are willing to invest and what will help you achieve your short-term and long-term goals.
The investment varies between franchises, depending on a wide array of factors. For instance, opening a food franchise has a much higher cost than a home-based, business-to-business (B2B) franchise due to the amount of equipment and inventory necessary to start the business. [Learn more about equipment leasing.]
Although some franchises want their franchisees to have specific industry experience, it's more important to have the basic business know-how and entrepreneurial drive to succeed. Many franchisors want franchisees who understand marketing, customer service and sales – and are concerned with increasing transactions.
What to look for when choosing a franchise
Once you've narrowed down the field and business model you're interested in, it's time to choose a specific franchise. Here are some factors to consider in your decision.
A strong support system for franchisees
One of the biggest benefits of buying into a franchise is that the brand is already established. Take advantage of your franchisor's knowledge and guidance, and utilize other support systems you gain through the franchise, such as owners of other locations.
Investment in your potential
Make sure you get the sense that the franchisor cares about your professional success and growth within the company. Some franchisors will even administer tests to determine the mindset and ambition of franchisees.
The franchisor's professionalism
As you make your initial inquiries to the franchisor, take note of how they handle your request. Do they answer questions promptly and thoroughly? These initial first contacts are crucial for you to get a sense of how the franchisor conducts business.
Mutual expectations
You should be clear on what your potential franchisor expects of you (and vice versa) and make sure the deal is a good fit for both parties before signing a contract. Think about the deal as a long-term partnership to understand whether you are ready for the commitment and can meet the expectations your franchisor sets.
Sales and business approach
Before diving into business with a franchisor, consider its approaches on matters like sales, marketing, and advertising. Consider whether these methods will be successful in the current marketplace and if you can afford the tactics and campaigns.
Online reviews
Be on the lookout for information on message boards, Facebook or LinkedIn groups, or articles where franchisees talk about their experiences with the franchisor. If the reviews are fairly consistent, you'll get a good sense of the company's business practices.
Feedback from current franchisees
The best way to learn about a franchise is to talk directly to folks within it. Ask them about the franchisor's support system, licensing fees, and any exclusivity that the franchisor might offer within a certain ZIP code or radius from a specific location.
Discussions at official events
Some franchises hold a "discovery day" or similar events where you can speak to representatives and learn more about the opportunities. Similarly, attending franchising industry conferences, such as the International Franchise Association's annual conference, is a great way to identify and compare your options.
Here are some other resources to help you select a franchise:
What is a franchise disclosure document, and why is it important?
A franchise disclosure document (FDD) contains 23 sections that details key points about the franchise, including the franchisor's obligations to a franchisee and all possible fees. By law, the franchisor must provide this document to franchisees before any money is exchanged. Here are some important sections to read carefully.
Past or current litigation
Items 1-4 of the FDD will tell you all about the franchisor's experience and whether the franchisor or any of the people in charge have been involved in bankruptcies or litigation relevant to the brand or their experience as a franchisor.
Payments and revenue model
The FDD also explains what you'll pay to the franchisor and its affiliates before and after opening, as well as how much the franchisor relies on franchisees for revenue. Items 19 (Financial Performance Representations) and 21 (Financial Statements) provide especially helpful insights on how well the units are doing financially.
Turnover and resource strain
Item 20 of the FDD provides a list of currently operating franchisees and a list of franchisees who have exited the system or stopped communicating with the franchisor. Contacting current and former franchisees about the franchise's profitability and challenges can give you the inside scoop on working with the franchisor.
What is a franchise agreement?
A franchise agreement is a binding legal document between a franchisor and a franchisee outlining the expectations, obligations, permissions, and restrictions of operation. It also provides a schedule of the fees that the franchisee will pay to the franchisor, including amounts or percentages and the frequency of payments. [Read related article: Ultimate Guide to Business Franchising]
How does a franchise agreement work?
Franchise agreements assign the rights to use a franchisor's intellectual property and resources to a franchisee for a predetermined amount of time. The rights and allowances assigned to a franchisee are very specific, leaving little room for expansion or error. These provisions are enforced to ensure that brand representation is consistent not only with the franchisor's standards, but also with the way the brand is portrayed universally.
What are the benefits of buying a franchise?
Buying a franchise cuts out some significant business development tasks that you would need to invest in if you were building a business from the ground up. This offers big advantages to those who don't have much experience starting a business. Here are some of the benefits:
1. You're buying into a proven business plan.
When you buy into a franchise, you'll likely receive a play-by-play business plan on how to conduct each process needed to run the business. This can include everything from how to make the fries to how to wash the floors. This proven manual has already worked out the kinks you might have had to discover on your own if you started a brand-new business.
2. The cost of operations is lower than with many other businesses.
Running a franchise is cheaper than running other businesses, such as a chain store. Franchises have lower overhead, since the franchisees often participate in day-to-day operations like serving or cleaning.
3. A lot of the marketing is done for you.
As a franchisee, you benefit from the name recognition that comes with licensing a regional, national or international brand. Some franchisors supply additional funds for marketing activities or marketing materials, such as posters.
4. Your supply chain and support systems are built out.
Your franchisor has already done the hard work of identifying reliable and cost-effective suppliers and service providers that make your business run.
5. You'll experience growth without having to manage everything.
By making your company's processes and other facets of its operation available for franchising, you can reap the rewards without managing everything. For instance, you'll be able to expand in areas that might have been more challenging without franchising.
Marci Martin, Stella Morrison, Max Freedman, Sammi Caramela, Andrew Martins, Marisa Sanfilippo and Nicole Fallon contributed to the reporting and writing in this article. Source interviews were conducted for a previous version of this article.