HOW TO BUY A FRANCHISE IN 10 STEPS
So you want to own your own business, but either you don’t have your own concept or aren’t willing to take the risk that comes with starting from scratch, and after examining all of your options, you’ve decided that you want to become a franchise owner. You’re in good company! According to the International Franchise Association (IFA), in 2015, there were almost 782,000 franchise establishments in the U.S. That represents an output of $889 billion, and the outlook for 2016 is pointing toward continued growth.
You’ve made your decision, but now comes the hard part — deciding which franchise to purchase and then actually going through the buying process. This will probably feel overwhelming, but here, we’ve broken the process down into 10 steps to make things easier for you. Each step will take time and energy, and possibly, some financial investment, but all of this work will be necessary if you want to be able to identify and capitalize on the right opportunity.
A franchise agreement is a long-term commitment. It’s not the kind of thing that you can “try out” for a year or so and if you don’t like it or are tired of it, walk away. You’ll be signing a contract and investing a significant amount of money, no matter which brand you choose to work with, so you owe it to yourself and your family to take your time. If you proceed thoroughly through each step of buying a franchise without rushing, you’ll find yourself matched with a business that will satisfy all your professional needs and goals, allowing you to build your own business legacy while contributing to the overall strength of the franchise chain.
Let’s take a closer look at how to buy a franchise in 10 steps.
Step 1: Do Your Research
This is going to be a time-intensive phase, but will not require any financial output. The research phase is where you’ll need to learn more about yourself as well as the potential franchise opportunities that are out there for you.
To get started, you must conduct your own personal and financial inventory. Focus on listing or defining your interests, past or current jobs, volunteer experiences, and talents/skills. Picture how you might see yourself spending your time each day. Would you prefer to be out in front of people, working with new customers in a retail environment, or would you be more comfortable behind-the-scenes or working out of your home? What are you looking for in a business, all things considered?
Next, assess your financial situation realistically, determining the amount of money you’re willing to commit to a business and identifying any possible avenues for additional financing. Make no mistake, franchising is going to require a financial commitment, no matter what franchise you ultimately decide to become a part of. You’ll be buying the right, from someone else, to operate a branch of their business. You’ll be purchasing the name, the branding, and the business model, plus the business’s systems, its resources, its advertising and marketing strategies, and support from the franchisor. Sure, there are brands that you can buy into for under $5,000, but to buy into a select group of the most expensive franchises, you may need to invest more than a million dollars.
While you’re conducting your inventory, make sure you write down your answers. Don’t just rely on what you think the answers will be. Take the time to write out all the possibilities or options that you can imagine, without quickly ruling anything out. Along the same lines, it’s important that you don’t set your mind on one specific franchise brand as you’re going through the inventory, as surprisingly, a brand that you might think you’d love to be a franchisee for might not end up being a good fit for you based on your interests, experiences, and financial situation.
Once you’ve conducted a thorough inventory, you should see a pattern starting to develop that points to the types of businesses you would be best suited for. After you’ve noticed that particular pattern, take your research online and examine the different franchise opportunities that you’ve identified as likely to suit you best. Start with Google, spend some time on the IFA website, and review the information on sites like this one. Visit online forums and see what is being said about each brand — the good and the bad. If you do see negative comments, be sure to find out (to the best of your ability) if each comment is just a complaint or if it’s a legitimate concern, especially if the same idea comes up again and again.
Whenever possible, identify and talk with franchisees in your area in order to hear about their experiences. An existing franchise owner can be a wealth of information as you go through the purchasing process, and not just at this stage, but later, too. Once you get through this inventory and research step, you should have one or two brands in mind that you’d like to pursue. If you still have more than a couple in mind, continue your research and personal inventory until you’ve established a clear front-runner (or two).
After you’ve narrowed down your choices, contact the appropriate franchisor(s) and request information about becoming a franchisee. You will now have the name of a contact at each franchise’s headquarters, and will receive a packet of materials in the mail. Keep in mind that the material you receive is marketing material that has been specifically designed to sell franchises, so it will always show the brand in a positive light. Take the information from this material and use it as a foundation for additional investigation — your work is not done yet!
Step 2: Examine Your Finances
Let’s say that, after conducting your inventory, you’ve decided on the franchise brand that you’re most interested in pursuing. Now, it's time to take a second look at your finances. You will be able to find out, through the information you've collected by doing research, what your expected financial investment will be. This may include costs for some or all of the following:
- The initial franchise fee
- Location or real estate fees
- Product inventory
- Marketing and advertising
- The grand opening
- Training (including travel, lodging, meals, incidentals)
- Ongoing royalties
- Any other fees specific to your business
- Your living expenses while you build up your franchise business
At this stage, you must now determine not only your access to capital but also what financing packages are available to franchisees. Some brands offer different financing packages in-house, while others have arrangements with different outside lenders.
Step 3: Meet the Franchisor and Ask Questions
If, after examining your finances, you’re still ready to move forward with pursuing your franchise business, you’ll need to start asking questions. Chances are, during the course of your research, you’ve come up with a list of questions that you need answers to. Don’t let these questions go unanswered, as any of the information gleaned from the answers you receive could serve as a make-or-break point when it comes to moving forward.
Be sure to talk with the local franchise owners in your area and attend a Discovery Day at your chosen franchisor’s headquarters to learn more about the business firsthand. If the brand has development agents or master franchisees, talk to them, too. The more contact you have with people who are already a part of the brand, the more you can learn and the better sense you’ll have of the culture and business model.
Step 4: Map Out Your Plan
Now that you’ve had your questions answered and have conducted your research, you should have an idea of the timeframe in which you’ll obtain the formal franchise documents, sign, attend training, build out your location (if applicable), and open for business. Make sure you map this timeline out in as much detail as possible so you’ll always know what is in store for you throughout the coming months or year.
Step 5: Set Realistic Expectations
When putting your strategic plan into place, set realistic expectations for your new venture. This is even something you can work on with one of your new contacts within the brand. Set specific expectations in regard to your income/financial situation and projected timeline before you open the business and then again once business is underway. Consider your initial outlay, your monthly obligations, and your expected earnings (remember to be realistic!). Don’t forget day-to-day living expenses, such as your mortgage, car payment, utilities, and taxes — those things that never go away!
A Burger King grand opening in San Francisco in 2015.
Step 6: Make a Verbal Commitment
If the signs from all of your research and analysis point to “go,” then you’re now ready to make a verbal commitment and proceed to the next step with the franchisor. At this point, you’ll receive all the different franchise documents (agreements) and officially begin the process of buying your franchise.
Step 7: Review the Paperwork
After you’ve received the franchise agreement and Franchise Disclosure Document (FDD), and any other materials that pertain to buying a particular franchise, review everything line-by-line. Go over any document with a fine-toothed comb and be sure that you understand all expectations, obligations, roles, restrictions, and even exit strategies that are outlined in each one. Have your attorney review the documents as well. Don’t skim anything — there’s a lot at stake, so it’s necessary that you have a thorough understanding of what you’re committing to before signing your name.
Step 8: Sign on the Dotted Line
Once you and your attorney have reviewed all the paperwork, if you’re still confident in your decision to buy a franchise and your ability to financially support that decision, go ahead and sign. By making that formal commitment, you will officially become a franchisee, and the next phase of the buying process can begin: the training.
Step 9: Attend Training
Each franchisor will offer some sort of training program for their new franchisees. Depending on the franchise model, training may be provided in a written/online format or, as is most common, in-person at the company headquarters, and the length of time required for training will vary among franchises.
This is where you’ll learn all the ins and outs of your new franchise business, including details related to operations, marketing, advertising, the products, the equipment, support, the evaluation process/compliance, ongoing training, communication vehicles, and so on. It’s important that you understand what the financial expectations are for the training program before you start. You’ll need to factor in costs for things like travel, lodging, meals, incidentals, and time spent away from any other work you’re currently doing. Going through training will likely be an overwhelming experience, but you will leave motivated and energized to open your own doors for business.
Step 10: It's Grand Opening Time!
You’ve worked hard, and perhaps you’ve felt like this day would never come, but now, it’s time for you to actually open your doors to customers or clients. All your efforts will culminate in this big moment. Depending on your business model, you may have support from your franchise’s headquarters for the grand opening, or you may need to rely solely on your own training and learning. Regardless, be sure that you know how to contact the franchise’s support team in case anything unexpected occurs, but have the confidence in yourself to know that you’re ready and more than able to handle anything that comes your way. Make sure your social media presence has been fully set up, and any advertising or direct mail you plan on using is in the works.
Buying a Franchise: A Review of the 10 Steps
- Do your research by conducting a personal and financial inventory, assessing your finances, and contacting franchises of interest for more information
- Take a second look at your finances and estimate the required financial investment for your chosen franchise
- Meet the franchisor and local franchise owners in order to ask questions
- Map out a timeline for the coming months or even the next year
- Set realistic expectations for your venture in regard to income and scheduling (revisit this step again after opening)
- Make a verbal commitment with the franchisor and receive all the important documents (agreements)
- Go over the franchise agreement, Franchise Diclosure Document (FDD) and any other documents you've received with a fine-toothed comb, letting your attorney have a look at them, too
- Sign on the dotted line and officially become a franchisee
- Attend a training program and learn virtually every detail about running your new franchise business
- Open your doors to customers or clients with confidence!
As you can imagine, the list of steps provided above add up to a very broad overview of what’s involved in buying your own franchise. There will be tons of intermediate, smaller steps for you to go through along the way, especially after you’ve opened for business. The work will occur both behind the scenes and in front, with each being equally important to your overall level of success.
The main point to take away from all this information is that buying a franchise involves a significant amount of time and financial commitment, but can also be extremely rewarding as you find yourself embarking on a new business journey as part of a brand you’re proud of. The amount of hard work and time that you’ll invest throughout the buying process will surely come back “many-fold” as you work your way toward becoming a successful franchise owner.
image 1: StockMonkeys.com (Creative Commons BY); image 2: Anne Petersen (Creative Commons BY-NC-ND); image 3: Lynn Friedman (Creative Commons BY-NC-ND)