ENTREPRENEURSHIP / JUN. 15, 2014
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How to Buy an Existing Franchise

If you’ve ever thought of owning your own business (and being your own boss!), but you don’t have an idea that could set the world on fire, you need look no further than buying a franchise. In fact, far from being a consolation prize because you can’t come up with something on your own, a franchise could prove the better investment.

What is a Franchise?

A franchise is an existing and successful business and operation model. Although, to be technical, you’re not buying a business so much as you’re buying a license. A franchise is an agreement between the franchisor (owner of the product, trademark, or trade name) and a franchisee (who purchases the right to use or distribute the product, trademark, or trade name). It involves paying a franchise or licensing fee in exchange for permission to use the product, as well as various support resources that could include training, marketing material, and financial assistance in the early stages. Fast food restaurants are the best example of a franchise, but they also include retail stores, health and beauty products and systems, business services, and hotels, among other things. With a few exceptions, anytime you find yourself in what could be referred to as a “chain” of stores, restaurants, or lodgings, you’re probably in a franchise.  

How Does It Work?

Money. Buying a franchise is usually very expensive, but it’s a rock-solid investment. The product or company already has a proven track record of success, so you’re buying into that. You pay a franchise fee (often hundreds of thousands of dollars, although it could be less), and in exchange, the company will provide a lot of the details, training, and technique to get started. Everything from the decor, store location, uniforms, product display, prices, and marketing will all be explicitly laid out in the franchise agreement. The agreement is a legal contract between the franchisor and franchisee, and it spells out the responsibilities and restrictions of both parties. It will state the franchise fee, and royalty fees (a percentage of monthly revenue that you continue to pay the franchisor), if any. Finally, the agreement is for a set period - you don’t purchase a franchise outright. It’s borrowed time. But, if you follow the rules and pay your fees, there shouldn’t be any difficulty renewing the agreement once it ends.    

Where Should I Start Looking?

Generally, you can contact a business directly if you’re interested in purchasing a franchise license. Many company websites have a franchise tab or section to that end (such as this page for Tim Hortons).

You might also check out online directory and listings. The International Franchise Association has detailed listings about franchise opportunities all over the world. There are many others that cater to specific countries, like Franchise Sales (US), Canadian Franchise Directory, and Franchise Direct (UK). It would also be worth your time to check out the national franchise association for your country (if one exists). Besides listing opportunities, they can also offer country-specific advice, tips, tricks, and point you towards necessary and suggested peripheral services like franchise lawyers and law firms (NOTE - absolutely use a franchise lawyer to assist with the agreement).

Why A Franchise?

There’s a lot to like. Many franchises are virtually turnkey, meaning everything is done and decided for you as part of the franchise agreement. You’re buying a proven and well-known system or product (although be aware that franchises can fail, too...there are no guarantees). A franchise fee can be expensive, but it’s often less than purchasing an existing business or starting your own. Employee training (and possibly for you, too) is almost always part of the agreement, and you’ll get guidance from the parent company in a multitude of other areas.

Why Not A Franchise?

You have to understand going in that the franchisor is in charge. They make the decisions. They own the product or trademark (you own nothing other than permission to use it). Your independence is anywhere from slightly to severely limited. The franchisor can terminate the agreement for any number of violations. You’re likely going to pay part of your profits each and every month to the franchisor for as long as you have the franchise, and many people struggle with that.     

That’s the good and the bad of it. Franchises are a popular choice with many people for obvious reasons, but be sure and check out your available options. And remember that a successful franchise in Location A is not automatically going to flourish in Location B. Tim Hortons is fantastically popular in Canada, for example, and the franchisees consistently make a very good profit. But it has struggled to match that success in the US.

Read up on the market. Look at comments and feedback from existing franchisees if available (and if not, ask why). Use a franchise lawyer (just Google it) to help with the agreement and other legalities. And be prepared to work hard...but hopefully reap the benefits of your toil. A successful franchise can be your ticket to financial freedom.

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