BUYING A FRANCHISE BUSINESS: Benefits, What to Look For & Best Practices

buying a franchise business
Image source: Inc. Magazine

Are you thinking of buying a franchise? In contrast to starting a business from scratch, franchisees pay a royalty and an upfront fee to use the franchisor’s name and business model. Therefore, buying a franchise has advantages in launching a business, but it often necessitates what to look out for and a sizeable initial investment. For many people, buying a franchise is an enticing entry into business ownership. Furthermore, when you invest in a franchise, you can potentially sell products and services with widespread brand awareness and benefit from established systems and practices. However, just like any other investment, buying a franchise does not ensure financial success. In this article, we will be looking at what to look for when buying a franchise business and what questions to ask.

What Is a Franchise Business?

A franchise grants the investor or franchisee the ability to operate a business. You pay a franchise fee in exchange for a format or system created by the corporation (franchisor), the ability to use the franchisor’s name for a set number of years, and help. For instance, the franchisor may assist you in locating a location for your store; provide you with initial training and an operating manual, and offer guidance on administration, marketing, and personnel. The franchisor may provide support via quarterly newsletters, a toll-free hotline, a website, or regularly planned workshops or seminars.

In addition, there are set costs, franchisor restrictions, and contractual duties associated with franchise ownership.

Essential Steps When Buying a Franchise

Before committing your money to a franchise, make sure you’ve done your research. Please think about the following questions:

#1. What Kind of a Franchise Is It?

Before buying a franchise business, it’s important to do some research into the company and the franchise model to learn more about the market potential, the number of existing franchisees, and the amount of competition.

#2. Who Is the Franchisor?

Learn as much as possible about the franchisor’s history. The length of time in operation, the number of franchisees in the US, and membership in the US Franchise Association are all relevant details to look for. Find out about a franchisor’s financial stability by requesting a bank reference and audited financial statements.

#3. How Much Does Purchasing a Franchise Cost?

Find out how much the franchise will cost and what it will provide you with. Your initial investment may only go toward getting your firm up and running, as many franchisors rely on royalties to generate revenue. 

However, decide how much money you need to keep the business running. See what the royalty rates are like so you can figure out how much money you can make. Find out whether there are any hidden costs associated with maintaining your brand’s marketing and advertising efforts.

#4. How Much Help Will You Receive?

Buying into an already successful firm is appealing, but only if the franchisor offers comprehensive training and continuing assistance. Learn about the set-up and ongoing support you can expect as a franchisee.

#5. What Guidelines and Limitations Apply to Trading?

Determine the duration of the franchise agreement and whether it can be renewed. Can you please detail any pricing, supply chain, or technological restraints placed on the company? What are the repercussions, if any, of your decision to sell the company or your inability to carry it forward?

#6. Consider Consulting With Franchisees Already in the Field.

Talk to current franchisees to get the lowdown on what it’s like to be in business for yourself, from the advantages and disadvantages to the risks involved.

What to Look for When Buying a Franchise Business

In your role as a prospective franchisee, you have certain goals in mind, chief among them being the realization of a profit and the maintenance of the franchise’s market value. It is your responsibility to do the necessary research before making any investments to ensure that your returns reach or exceed these targets. When done right, purchasing a franchise can be a fantastic first step toward becoming your own boss.

 You might gain from associating with a well-known company that sells a sought-after product or service. You can get help with things like advertising and marketing, and you can use the included operation guides to improve how you manage your business.

However, when you buy into a franchise, you have significantly less say over the when, where, and for how long your firm operates.

#1. The Territory

It’s necessary to specify the boundaries of the brand’s protected zone before anyone buys a franchise there. The size of the area may be less of a factor in urban or suburban settings. Additionally, the population number can be used as a criterion instead of geographical location. However, one of the most crucial things to know before signing a franchise agreement is the boundaries of your region. 

#2. Dispute History

The franchisor’s lawsuit record is crucial, especially if the company has been around for some time. Cases against a franchise system’s own franchisees are the most important legal actions for a potential franchisee to review, though prospective franchisees should also take note of ancillary litigation, or cases involving third parties like suppliers.

In the franchise industry as a whole, it is impossible to pinpoint an exact number of lawsuits that would be considered excessive. There may not be much of a deal if a franchise is on par with McDonald’s in terms of legal cases, but that could be hundreds. However, a franchisor with, say, 500 units and 25 lawsuits needs to be looked at more closely.

#3. Possession of a Franchisee’s Right to Acquire Assets

At the conclusion of a franchise agreement, the franchisor often has the option to purchase the franchisee’s assets. If the price is right, selling your franchise back to the franchisor is perfectly acceptable. Read the fine print before letting a franchise corporation buy your company. If the franchisor proposes to utilize a “depreciated value” formula to determine the acquisition price, that should raise red flags.

#4. Restrictive Agreements

Restricted agreements regulate what a franchisee may and may not do both during and after its ownership. A typical covenant for owners would detail their obligations to refrain from engaging in competitive businesses, with a subset perhaps addressing the level of engagement they are expected to have in the day-to-day operations of the franchise.

However, the post-ownership, or “post-term,” phase is where the majority of the covenants’ impact will be felt. This could be because the former owner is no longer involved in running the company, has been fired for cause, or has sold the company to new management.

#5. Ownership Transfer Rights

When it comes time to sell the franchise, the franchisee may find themselves in a difficult position due to factors other than just “depreciated value.” When a franchisee decides to sell their company, the franchisor typically has the right of first refusal, which allows them to purchase the business at a discount. Rather than allowing a franchisee to sell their firm to a third party, a franchisor should have the right to take back control of one of its business units, but this should only be the case if the franchisor is ready to make a fair deal with the franchisee.

Read also 7 Reasons Why You Should Franchise a Business

Advantages of Buying a Franchise Business

In exchange for regular payments of fees and/or purchases, a franchisor in the franchise sector gives a tried and true method of conducting business as well as ongoing direction, procedures, and help.

One option for starting a business from scratch is to invest in an existing franchise. Some advantages of buying a franchise business are detailed below.

  1. Franchises have a track record of success, a well-known brand name, tried-and-true methods of operation, widespread exposure, and consistent back-up from the franchisor.
  2. Franchises combine the autonomy of independent small business owners with the resources of a large enterprise’s established brand name and distribution channels.
  3. Franchise ownership typically requires little in the way of prior business experience. Typically, franchisors will give the necessary training to run their franchise.
  4. The success rate of franchises is far greater than that of new businesses.

Is Buying Into a Franchise a Good Investment?

The simple answer is yes, particularly in the event that a fantastic opportunity presents itself. Buying an existing business to use as the basis for a new venture is an attractive option.

How Much Money Do You Make Owning a Franchise?

According to research conducted by Franchise Business Review, the typical yearly income of franchise owners in the United States is $80,000 before taxes. Of franchise business owners, only 7% make over $250,000 a year, while 51% make less than $50,000. Franchisors are prohibited from disclosing any financial information, including past earnings and projections for the future.

Can You Make Good Money by Buying a Franchise?

The purchase of a franchise may appear to be a simple way to make money, but the ongoing royalties and fees will quickly eat away at any profit margins. The majority of people who own franchises bring in an annual income of less than $50,000.

Questions to Ask When Buying a Franchise Business

Looking within and asking yourself what you need and want in a franchise and what you expect to gain from franchise ownership is a necessary first step before diving headfirst into studying franchise businesses.

Furthermore, if you’re thinking about buying a franchise, instead of focusing on finding the “ideal” brand, you should give more thought to your own set of beliefs, aspirations, abilities, and resources. After that, connecting with compatible franchisees is a breeze. Here are the top four questions you should ask yourself when buying a franchise business.

#1. Do You Think You Have What It Takes to Run a Business?

Becoming a boss is tough. It’s thrilling, empowering, freeing, and life-changing, but also dangerous and daunting. As a franchise owner, you’ll put in long hours and hard work, at least in the beginning. Franchise owners must have patience and dedication. Sometimes it takes years for a firm to start making money, so you must be patient.

#2. Is It Fun for You to Stick to a Regimen?

Many motivations drive franchise purchases. Franchising’s proven method is a major draw. Usually, a company doesn’t start franchising until it has an established, successful business that will franchise well. This suggests they’ve fine-tuned their company processes and procedures based on market experience, and likely continued to do so after franchising based on franchisee feedback.

#3. Which Type of Franchise Ownership Do You Seek?

While most franchises require a full-time commitment, others can be run on the side. Some franchises, like those in the cleaning and tourism industries, can be purchased for a reasonable sum and run on a part-time basis. However, this is a rare exception rather than the norm. As many franchises cannot be successfully run on a part-time basis, it is important to have a clear idea of what you are looking for before beginning your research.

#4. Do You Have a Deep Interest in the Field in Which You Plan to Open a Franchise?

A franchise agreement is often compared to marriage by those considering one. You should be confident that the company will sustain your investment for the duration of the franchise agreement, which in many cases, it can be as long as ten or fifteen years. Consider your role in the company, the company’s focus, and any other relevant aspects when you do this.

In addition, pick a field and company that you’re excited to work in.

Do Franchise Owners Get Rich?

Even though owning a franchise can make you wealthy, it’s not a sure thing. Even if you have the perfect business in the right market and enough money to invest in or start up, there is no guarantee that you will be successful.

What Franchise Can I Open for 10K?

There are a wide variety of franchises available for investment that does not necessitate a large sum of money upfront. In reality, you won’t need more than $10,000 to embark upon the hottest business opportunity or launch your own company. Here are the top four franchises you can start for 10k.

  1. Krispy Krunchy Chicken
  2. Fit4Mom
  3. Jazzercise
  4. MOMLETA / Baby Boot Camp

How Do I Start Franchising?

Trying to figure out how to start a franchise can feel like an insurmountable task. From forming an LLC to writing a business plan, there is a lot to accomplish, but it’s not all necessary at once. The steps below are what you should take if franchise ownership is something you’re considering.

  1. Do some research on your options.
  2. Choose a franchise that supports the objectives of your company.
  3. Make a corporation or an LLC.
  4. Set up finance.
  5. Consult the franchise owners and operators.
  6. Communicate with the community.
  7. Create a business plan.

Conclusion

Buying a franchise, or starting a new business, is both an exhilarating and nerve-wracking experience. But if you do your homework and ask the appropriate questions, you’ll be able to make an informed conclusion and move forward with conviction.

Buying a Franchise Business FAQs

How often do franchises fail?

The survey of 20,500 small firms indicated that 65.3% of franchisees and 72.2% of independents lasted four years. Retail franchises performed worse than individual retailers, with a 61.3% survival rate.

Which franchise is the cheapest to own?

Jazzercise. Franchise fee: $1,250

How much is a Starbucks franchise?

For Starbucks to consider you for a licensed store, you must pay a licensing fee of between $50,000 and $315,000 and have more than $1,000,000 in cash on hand.

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