If you are interested in starting your own business, franchising is one of the best options because the business is already built. However, it’s a major investment, so before you get started, you must do your research and understand how a franchise is different from an independent business or a chain. Owning a franchise is not the same as owning a business from an idea that you came up with on your own.
In this article, we’ll explain everything you need to know about being a franchisee, including how to buy one, options for financing, and other factors.
What is a Franchise?
Before we can get started, we must first define what a franchise is. This is a business owned by 1 or more people who provide products/services under branding/rules set forth by the parent company. The franchisee will be required to pay a fee in exchange for assistance with marketing and inventory from the parent company.
Types of Franchises
There are 5 primary types of franchises you may encounter through your research, each with its own considerations and opportunities:
- Job franchise: typically requires low investment/overhead, low equipment/stock requirements, and some are home-based. This may include children’s services, cleaning franchises, and lawn care services
- Product franchise: franchisee distributes franchisor’s products; franchisee receives franchisor’s trademark, but no infrastructure. This may include soda companies, machine companies, and automotive companies
- Business-format franchise: the most common type of franchise; the franchisee is given access to all of the franchisor’s systems, including training, marketing, and operations. This includes business services and fast food companies
- Investment franchise: requires franchisee to invest their own capital through cash or overseeing of management team. This includes large restaurants and hotels
- Conversion franchise: business-format franchising with acquisition; franchisor acquires other businesses within their sector and converts them to their franchise, allowing the business to access the franchisor’s system resulting in less competition and more profits
Difference between franchise and chain
A chain describes 2+ stores that have the same brand and similar corporate policies, offering the same products/services as the parent company. While this seems similar to a franchise, there are several differences, including:
- Ownership: a franchise is owned by the franchisee, a chain is owned by the parent company
- Financing: franchisees can get financial help from the franchisor to cover expenses, allowing them to gain faster growth than chains
- Operation costs: a franchise typically costs less to run than a chain store due to their lower overhead/operation costs
- Profitability: franchisors must share profits with their franchisees, while the parent company of a chain store does not
Initial Investment Costs/Franchise Fees
When you own a franchise, you must spend money before you can make money. You will be required to pay franchise fees, which gives you the right to operate the franchise location. The cost of franchise ownership varies from around $10,000 to $100,000. In addition, you will be required to pay ongoing marketing/royalty fees, which are typically determined by how much your location is making.
How Much Can You Make as a Franchise Owner?
The amount of money you can make as a franchise owner depends on several factors:
- Loan payments
- Required reinvestment, including franchise fees
- Taxes
These must be paid before you can pay yourself. According to statistics, in December 2021, franchise owners were earning an average of $93,000 annually, which includes a base salary of around $63,000 plus additional pay of approximately $30,000.
To learn more about your earning potential, you may want to ask the following questions to other franchise owners:
- How much money have you made each year since the inception of the franchise?
- How much was your take home?
- What unexpected expenses did you incur?
- Based on your experience, what can I reasonably expect to earn?
You’ll also want to keep in mind that if you have the same franchise or a competitor within close proximity, your profits may be affected.
Steps to Buying a Franchise
If you are interested in becoming a franchisee, here’s what you need to do:
Determine your reasons
Owning a business is a major emotional, physical, and financial undertaking. Before you jump into franchise ownership, make sure that you know why you want to own one. If you believe that owning a franchise will be easier than other types of businesses, keep in mind that owning any business has challenges.
Research your options
Just because a particular franchise is popular doesn’t mean it’s right for you. When choosing a franchise, learn more about how the parent company works with their franchisees, as well as the local market. You’ll need to invest several weeks into the process, investigating the following:
- Sales/profit track record
- Growing market
- Social responsibility
- Local competition
- Repeat business
- Opportunities to upsell products/services
- Franchise fees
- What it’s like to work with that franchise
Start your application process
Once you’ve chosen a franchise, start the application process. This is where you may need to have a franchise attorney because the franchisor will be screening you as part of the process. They will look at
- Your finances
- Your background (education, work history, reasons for wanting to own a franchise)
- Your location
- Your reasons for choosing their franchise and what you know about it
Schedule your “discovery day” meeting
Prior to the pandemic, a face-to-face “discovery day” would be held so that the franchisor and potential franchisee could get to know one another, and questions/concerns could be discussed. Since the pandemic, these meetings are typically held virtually. For some people, a face-to-face is better, so feel free to request that if you choose. Some franchisors schedule these toward the beginning of the process, while others wait until closer to the end.
Apply for financing
In most cases, you’ll need financing to launch the franchise, which typically comes in the form of bank financing. If you need funding, consider your options and start applying for the funding that you would most likely qualify for.
Carefully review/return your franchise paperwork
These contracts are long and potentially confusing, which is where a franchise attorney can help. They can answer any questions you might have.
Buy/rent your location
By this point in the process, you should have chosen the town/city where you plan to establish your franchise. Now you’ll find a commercial space to purchase or rent.
Get training/support
Since you’re buying into an established brand, they already have a logo, guidelines, messaging, and products in place. At this point, you’ll begin to familiarize yourself with the various aspects, including:
- Branding
- Where to buy and sell the products and services
- Payment tech, including credit card processing
- Product placement/POP displays
- Sales tactics
Financing Options to Pay for Your Franchise
While it’s true that there are fees that must be paid upfront, you don’t have to have all of the money in hand before getting started. There are several options for financing, including:
Liquid Capital
Liquid capital should be approximately 25% to 30% of your loan request and may include cash-on-hand, assets such as home equity, or cash infusions from family/friends and/or investors
Traditional/SBA-backed Loans
The SBA has a list that includes hundreds of high-quality franchises, which helps expedite the loan process.
Leverage Assets to Self-Fund
Leveraging of real estate assets, lines of credit, and business startup programs that allow you to roll over your retirement funds without incurring taxes or penalties are a few of the self-funding options.
Partnership
You may want to consider partnering with someone, but most franchises do require all shareholders to sign the franchise agreement.
Getting Started the Right Way
Owning a franchise can be fulfilling- but before you make the commitment, take your time and do your research. You may also want to hire a franchise attorney to make the process easier. If you need additional help with funding options, contact Commercial One Group.