A franchise can be a great option for entrepreneurs looking to start their own business, but don’t want the hassle of setting up a brand or system. It isn’t as easy as it seems to purchase a franchise. This article will walk you through eight steps to purchase a franchise.
1. Research Potential Franchise Opportunities
Do your research about the various franchise options available before you buy a franchise. It is important to choose the right franchise for you based on your personal interests, budget, and qualifications. You can usually find many franchises in the United States on different online sites.
It is important to research the requirements of a franchise to determine if it is right for you. Next, do a self-analysis to determine your skills, interests, and resources. After you have done all this, you can use an internet franchise website such as FranchiseGator in order to search for opportunities that suit your needs.
Let’s take a look at each part of your research.
The typical requirements for franchisor qualification
To ensure that their franchisees have the right qualifications, franchisors often set minimum requirements. Because their business reputation and brand are directly affected by the success or failure of their franchisees, this is important.
The qualifications required vary depending on which franchisor you are buying and what type of franchise it is. The following are important to remember:
- Credit score Although minimum credit scores can vary from franchisor to franchisor, it is generally a score of 680 and higher that is considered ideal. You can check your credit score for free.
- Net Worth: If you are looking to invest in a franchise, you will need a net worth that is comparatively higher to be eligible.
- Cash available: To cover franchise costs and/or a down payment, you will need enough cash.
- Other income: While you are acquiring the franchise, you should have other sources of income and resources that can help you with your daily living expenses.
- Industry experience: While some franchises don’t require industry experience, franchisors tend to be more confident if you have the relevant experience.
- Management experience: A franchisee is responsible for leading a team or managing a company. If you don’t have any management experience, it could indicate that you are not qualified to succeed.
Below are the average demographics of franchisees, as determined by the International Franchise Association. This will help you determine if you qualify. Franchisees typically are:
- Ages between 35 and 55
- Achieve an income of at least $60,000
- A net worth of at least $250,000
- Do you have corporate management experience?
- You can have an individual retirement account (IRA), or a 401(k), retirement plan
- You have never owned a business before
Personal Resources, Skills, Interests
It is important to do a self-analysis about your skills, interests, and resources before you buy a franchise. Franchisors will also ask you about your financial and professional history. You can narrow down your choices by knowing what you are capable, professionally, financially, and skillfully.
A net worth report is required to list all assets, liabilities, income and credit scores. You can check your credit score for free. A resume that highlights all of your industry, managerial and professional experience is required. This will help you to be the best candidate for a franchise.
You should also plan your timeline for purchasing a franchise. This will determine how much time you have available to do initial research, contact franchisors, review franchise disclosure documents, franchise agreements, obtain financing, and choose a location.
Find Franchise Opportunities
Once you have information about your finances and net worth, your skills and interests, and a time frame that works for your schedule, you can start looking for a franchise that suits your needs. You should choose the franchise that best suits you, your interests, and your budget. Do not be tempted by trendy franchises.
There are many options available for franchises that can be chosen based on industry type, location and initial investment. These options can be found on numerous franchise websites, which list available franchises.
It is a good idea to read reviews and complaints about the franchises that you are interested in. To better understand potential franchise opportunities, you can visit the Better Business Bureau or Unhappy franchisee based on past franchisees’ experiences.
Here are some things you should consider when looking for a franchise opportunity.
- Total investment: This includes franchise fees and training expenses, costs to leasehold improvements or real property, employees, inventory and marketing, as well as furniture and fixtures.
- Ongoing costs: This includes royalty fees and marketing/advertising fees on top of your regular operational expenses.
- Training and Support: Learn what training and support you can expect from franchisors. Also, find out how much and where to get it.
- Competitor: Find out how close you are to other franchises and if any businesses are already competing with you
For more information about these franchise opportunities, please read our detailed article on the best franchises for buying.
2. For Initial Applications or Franchise Disclosure Documents (FDDs), contact Franchisors
You should now narrow your choices to the franchises that most suit your needs and budget after you have done your self-assessment. The next step is to fill out the franchisor’s preliminary questionnaires/application forms. This preliminary application is used to screen potential franchisees and remove those who aren’t a good fit.
To help franchisors assess your qualifications better, it is recommended that you complete these initial forms accurately and completely. If you have met the initial requirements of the franchisor, you may be able to set up a meeting with their representative to receive a copy the franchise disclosure document.
The Uniform Franchise Offering Circular (UFOC), also known as an FDD, is a 50-plus-page document that outlines all your responsibilities as a franchisor, as well as the fees and rules you must follow. The FDD also contains information about the franchisor including its legal and financial history. An FDD is the best way to find out if a franchise opportunity is right for you.
Federal Trade Commission (FTC), which mandates franchisors to provide potential franchisees with an FDD within 14 days of signing binding agreements and making payment, has issued a directive. Franchisees are advised by the Federal Trade Commission (FTC) to carefully read and review FDDs. The 23-step FDD format is the same. The level of disclosure and transparency will vary from one franchisor.
Here are some examples of common information found in FDDs.
- The growth trends and size of the franchise system over three years are indicative of its success.
- The brand presence of the franchise in the state where it is located
- The experience and leadership team of the franchisor
- Initial investment, ongoing fees and possible charges
- Franchisees receive support such as training, financing and operational assistance
- Financial performance of the franchisor
FDDs don’t often include information about the average performance of franchise businesses, average unit volume (AUV), typical profit/loss and reasons for unit closings. They also do not address franchisor investment in future growth and industry comparisons. This information can sometimes be found in the press releases of franchisors, annual reports, public filings, or independent third parties such as FRANdata.
The FDD is required by banks, lenders and other investors who are likely to finance your franchise business. The FDD will have a significant impact on your business plan. It is essential that you understand and read it well. This guide will help you to understand and identify the key sections.
3. Participate in the Franchisor’s Discovery Day
After signing a federal disclosure agreement you will be able to meet the management team of the franchisor during discovery day. This usually takes place at the franchisor’s headquarters. This is a chance for the potential franchisee and franchisor to get to know one another and ask questions about any aspect that could affect the business’ success.
Discovery Day for Potential Franchisee
A potential franchisee can get to know the franchise’s management team and franchisees at a Discovery Day. It’s also a great opportunity to get to know the culture of the franchise and the personalities of the people you will be working with. This is the ideal time to ask questions or voice concerns that weren’t addressed in the FDD.
The typical discovery day agenda includes group presentations, one-on-1 meetings, interviews, and visits at existing franchise locations. During discovery day, be aware of the following red flags:
- Cultural or personality misfits
- Organization at the corporate level
- Promises and assurances not made in writing
- Questions not directly answered
- Clearly addressing concerns
- Selling hard
Learn more about the company’s growth plans. The speed at which the company plans to grow is another red flag. It is possible that the management has not created a sustainable plan for growth and the company is trying to expand too fast. This could cause havoc in your business.
A company without plans for expansion or growth could indicate that it doesn’t have a clear vision for the future, and is content to stay static. A franchisor who doesn’t plan to grow could limit your chances of becoming a franchisee.
Discovery Day for the Franchisor
Franchisees must be selective in choosing their franchisees. They need to ensure they are a good fit for the business and that they meet their financial needs. The franchisor should also have the opportunity to get to know you personally and ask any questions not answered in your application.
Franchisees will not only verify your qualifications but also assess your enthusiasm and commitment to their business. They want you to be willing to follow their policies and rules. They are looking for franchisees that have the ability to lead and work well with others.
4. Carefully review the Franchise Agreement
If they consider you a qualified candidate for a franchise, the franchisor will give you a franchise agreement. The contract grants you the legal right and authority to open and own a franchise according to their rules and regulations. You should consult a franchise lawyer to discuss the contract and help you understand it fully.
It is important to have any verbal promises made by the franchisor during the meeting written down in the contract. If the franchisor promises legal support in the case of a lawsuit, for example, it is important that this is included in the contract. The contract must clearly state the rules regarding suppliers, pricing, transfer ownership, protection of territory and royalty fees as well as how to hire staff, train employees, and other pertinent support.
Any discrepancy in what was discussed verbally with what is written in a contract should be raised immediately with the franchisor for clarification. Sometimes you might be able negotiate changes to the agreement that match what was discussed. Sometimes, the franchisor may insist that the terms of the agreement are final and cannot be modified.
Rocket Lawyer is an online legal service provider that offers expert advice. The site has an expert team of attorneys who can help you with legal questions and document review. Rocket Lawyer allows you to connect with experienced lawyers who can provide advice regarding your franchising agreement.
5. Find the right financing for your franchise startup
The next step after you have reviewed and signed the franchise agreement is financing. To cover the cost of buying a franchise, you will need financing. First, you will need funds to cover the costs associated with buying a franchise. This fee is usually due once you have returned the signed agreement.
If you plan to borrow money for your franchise, you will need a strong, convincing business plan. This should include years of growth projections. You should address matters in your business plan which are not covered in the franchise disclosure document. These include potential revenues for your franchise location, startup expenses and normal operating costs, as well as financing costs. To make it easier, it’s recommended that you use business plan software.
Lenders will rarely lend money to pay the franchising fee. If you are applying for a Small Business Administration loan (SBA), or any other conventional bank loan, the franchising fee may be considered part your down payment. The franchise disclosure document provides more information about what you will need to pay.
To finance your franchise business, you can choose from any of these funding options:
- ROBS A ROBS allows you to use it to finance your franchise without the need to pay taxes or early withdrawal penalties. ROBS isn’t a loan and doesn’t need lender approval. It is usually faster than other startup loans. For more information , contact Guidant if you have at least $50,000 in qualified retirement accounts.
- SBA Loan: SBA loans are guaranteed by government and have low interest rates. They make a great option to fund your business. SBA loans have strict requirements and are more difficult to qualify for for new businesses. You will typically need a credit score above 680 and a 20% downpayment.
- A bank loan: Conventional loans can be more difficult than SBA loans, because they are not guaranteed. You might be eligible if you have good credit, are wealthy, and have had previous business dealings with the bank.
- Financing through a franchisor or partner lender: There are some franchisors that offer financing to cover a portion or all of the franchise costs. Other lenders may be able connect you to partner lenders who have a track record and are familiar with the franchise’s business model. This will make it easier to qualify.
Finance of a New Construction Project or a Long-Term Lease
You will typically need funds to either build a new building or lease space for your franchise. You should coordinate closely with your potential lender and the franchisor as they may have specific rules regarding the location. Before you begin building or renovating your space, you might need their approval.
Finance Equipment for a Franchise
The franchisor might recommend a wholesaler or distributor if the franchise requires significant equipment investment. The franchisor might also offer financing. This is usually structured as a lease with a term up to five years.
Before you approve short-term loans to finance equipment, make sure you consider your cash flow over the next few years. Longer-term loans are preferred as recurring payments will likely be lower and can make the first few years more manageable. You can find more information about financing your franchise in our comprehensive guide to franchise funding options.
You can rollover your retirement money for business startup costs (ROBS) if it is in a qualified retirement fund. ROBS is a way to get your retirement funds without having to pay early withdrawal penalties or taxes. It doesn’t require approval from a lender, so it’s much faster and easier to obtain. For more information, contact Guidant if you have $50,000 or more in retirement accounts.
6. Select a location
You must choose a place where your franchise can be run. You will be provided with guidelines by franchisors to help you meet their requirements regarding location. These may include a minimum distance from other franchises and parking spaces. To ensure that you find the best place for your needs, a commercial realty agent can help.
Leasing vs. Buying Your Location
Most franchise owners lease property because it is cheaper upfront and less risky. If you have the funds to purchase your own property, it may be worth considering if you plan to stay in the same area for seven years or longer.
Our complete guide to commercial realty loans will assist you in financing your purchase of property for your franchise. A conventional lender might not be able to approve you for a commercial loan if your startup is new. There are many nationwide lenders such as South End Capital who will finance non-conforming real property deals.
These are some things to consider if you’re looking to lease a property.
- You should consider the safety and accessibility of the area. Consider whether the area is close to your competitors or customers.
- As accurately as you can, estimate the area you require
- You can negotiate your rent and not extend your lease for longer than is necessary
- Take into account the locations of your clients and employees.
- You can negotiate your rent and not extend your lease for longer than is necessary
Before you sign anything, it’s a good idea for an attorney to review the potential lease. Rocket Lawyer can help you if you have any legal questions. You can get help from experienced small-business attorneys to purchase your franchise. Get your first seven days free.
7. Get the Training and Workshops You Need
Next, you will need to complete all necessary workshops and training to provide your staff with the knowledge and skills necessary to manage your business. The training sessions are usually provided by the franchisor and can be held at their headquarters, at a location that is franchised, or online. They typically last one to two weeks.
Training sessions typically cover all you need to know about the franchise’s products, services, systems, and policies. Many franchisors offer training on marketing, managing suppliers, hiring employees, filing permits and bookkeeping, as well as creating reports. These training sessions may include classroom lessons, hands on work, and equipment and system training.
8. Get ready for your grand opening
After you have received all necessary training, your location is now ready to open for business. Your franchisor may offer support in opening your franchise. This will mainly be focused on marketing and promotional programs that will help you quickly build your customer base.
It’s a smart idea to dedicate a portion of your first year’s marketing budget for grand opening promotion. It’s a good idea to ask your franchisor about the opening ceremonies of successful franchise locations. It is important to learn what worked for franchisees previously, so you can prepare for your opening day.
The purchase of a franchise doesn’t remove the risk associated with starting a business. If you are able to learn how to purchase a franchise, locate the right franchise for your needs, read the FDD and the franchise agreement carefully, and get the financing you need, you will be well on your way to starting a business that is successful.