Buying a franchise is a good way to enter entrepreneurship with a proven business model and built-in support. However, it’s not necessarily an “easy” way to start a business. Here are three things you should know about buying a franchise.
There are two main franchise models
When you’re getting started there are two main types of franchise agreements you can choose between. The first is a business format franchise, which is the most popular type of arrangement. The franchisor will give you everything you need to get up and running. The company name, the products, and operating system are already decided for you. The franchisor will be heavily involved so you will have less creative control in this arrangement. But this also leads to less guesswork on your end. However, you should be prepared for significant involvement from franchisors.
The second franchise model is a product distribution franchise, in which you receive access to the products but not necessarily the system for doing business. This is similar to a supplier-distributor relationship. The franchisor provides the product and you sell the product. With this type of franchise, you won’t have as many restrictions put on you. There will probably be certain guidelines you’ll need to follow but you’ll be much more independent.
A franchise can cost anywhere from $20,000 to $100,000.
Buying a franchise is cost-prohibitive for many people
Traditionally, buying a franchise is an expensive endeavor. For a typical franchise, you can expect to pay fees between $20,000-$50,000. If you want to buy a master franchise, the fees can run as high as $100,000.
And keep in mind, those expenses are just for the fees alone. This doesn’t include the total investment costs to open that business. It also doesn’t include royalty payments, marketing fees, inventory, licenses, and other expenses going forward.
Taco Bell is the fastest growing franchise in the U.S. with Dunkin Donuts coming in second. You can expect to pay up to $2.6 million to buy a Taco Bell franchise and up to $1.7 million to purchase a Dunkin Donuts franchise.
Of course, financing the purchase through a business loan is always an option. But you will need to have a solid history and the bank will likely require a down payment.
You should do your homework first
Buying a franchise is a big commitment, so you’ll want to do your homework first. The best place to start is by talking to past and current franchise owners. Find out what they like and dislike about running a franchise and what you should know to be successful.
When you start looking for a franchise to buy, you should look for one that aligns with your skill sets and experience. And make sure you consider how much involvement you’re wanting from the franchisor.
Finally, make sure you spend time reviewing the Franchise Disclosure Document. This a list of the current franchisees and those that left in the past year. You’ll be able to access this once you find a franchise you like and the owner agrees to review your application.
This will give you valuable insight into the franchise you’re considering purchasing and how the business is doing, in general. This document can be quite dense so it’s a good idea to review it with an attorney. They can give you an overview of the business as well as any bankruptcies or litigation the franchisor is facing.
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