How to Buy a Franchise: A Quick Guide

Close-up of the McDonald’s logo at Times Square in New York City ViewApart / Depositphotos.com

When you think of business, you generally think of it as going solo and working for yourself, having an idea, pouring your own money into it and then trying to sell it to the general public.

But do you really need to have an original concept to succeed in business? The answer to that question lies in franchising, the corporate process of granting someone else your idea, expertise or process.

An example of a franchise could be Subway or Pizza Hut or 7-Eleven or The UPS Store. Put simply: there are franchises all around us, and the number of them continues to grow. The days of mom-and-pop stores are over. It’s all about corporate brands!

If you’re thinking of opening up a Planet Fitness or a Papa John’s Pizza, then you need to know how to buy a franchise.

We’ve got you covered with these nine tips.

1. Research Opportunities

When you’re interested in buying a franchise, the very first thing you must do is research the opportunities available in the open market. Some franchises are better suited for your budget, experience, qualifications and personal interest – if you love to brew coffee, you’re not going to bake pizza (unless you’re serving a coffee-pizza concoction, which will probably not be open for long).

Unsure how to find franchising opportunities? Here are some recommendations:

  • Use online resources to locate any franchising openings in your city.
  • Get in touch with a franchise broker – this is something who connects an entrepreneur with a brand.
  • Read reviews about previous franchisees and their experiences in the industry.
  • Contact the business that is offering franchising prospects in your area and ask about training and support, ongoing costs and total investment required.
  • Perform a self-analysis and determine your related human capital to start a business.

It is always better to be armed with plenty of information.

2. Determine Qualifications

Believe it or not, franchisees need to have several qualifications before they are permitted to open a Tim Hortons, Starbucks, Subway or Dunkin’ Donuts. Some might deem this to be unfair, but anything that impacts franchisees will automatically and directly affect the brand’s reputation and bottom line.

Do you have these basic qualifications?

  • a good credit score
  • sufficient cash on hand
  • another form of income
  • a high net worth
  • management and industry experience

It may not be surprising to learn that franchisees, according to industry data, are between 35 and 55 years of age, have a net worth of $250,000 or higher, have corporate management experience and maintain a retirement plan. You don’t need to fit this description, but it’s nice to know what you’re up against.

3. Contact Franchisers for Applications

Once you have done some professional introspection and completed your research on franchising – what you want to focus on, how much you have at your disposal and if you meet the general criteria – now is the time to contact the franchisers and request applications.

If you’re speaking to someone who is in charge of franchising, or a representative who is available to answer anything you need to know, then be sure to pick their brain. Other than that, request a preliminary application form – it is highly recommended to fill these pages as accurately and descriptively as possible.

4. Calculate Associated Costs

Are franchise fees fair? The answer to that question really depends on your point of view. For the company, requesting a certain number of fees is justifiable because they offer training programmes, corporate assistance and the overall business concept. For the franchisee, they are the ones doing all the hard work, clocking in all hours of the day and dealing with the bureaucracy of franchising.

That said, it doesn’t really matter if you think something is fair or unfair – nobody is going to change their business model to appease one or two people.

So, when you’re just starting out, it would be a prudent idea to calculate all the associated costs:

  • franchise fee
  • royalty fee
  • monthly lease and security deposit
  • equipment
  • signage (the franchisee is obligated to purchase as part of a package)
  • opening inventory
  • working capital (utilities, telecommunications and staff)
  • advertising costs (you pay into a national fund to promote the brand).

5. Attain Financing for Franchise

Many financial institutions are happy to work with franchisees. Since they are immediately aware of how popular a particular business is, like a McDonald’s or a Taco Bell, they will view the arrangement as less of a risk with all the rewards. But you still need to go through the proper steps of attaining financing, such as undergoing a credit check, signing a franchising agreement and providing other personal details that you would provide should you have started your own company.

In addition to getting a traditional loan, some franchisors are willing to offer financing to help fund these initial costs. Or if the business doesn’t lend to you, then it might connect you with partner lenders who will be buying into the franchise and taking a share of the business until the loan has been repaid.

6. Seek Out Legal Advice

Like buying a house, purchasing a franchise is one of the biggest financial decisions you will make in your lifetime. As such, it would be necessary to consult with a franchise attorney, because franchise law is complex – the typical business attorney is generally unfit in this highly specialised field.

A franchise lawyer is critical in this venture because they will review all the documents related to the purchase, ensure you understand all the terms and conditions and discover anything that you were unaware of prior to signing the franchise agreement.

Speaking of which…

7. Review the Franchise Agreement

Since you are getting involved in a pretty big deal, it would be wise to review the entire franchise agreement from the title of the document to the final word. Again, this is where a lawyer comes in handy. We will warn you now: the franchise agreement is not as easy as reading Dr Seuss – it’s hard.

The ‘party of the first part’, ‘invitation to treat’ and ‘capacity’ are some of the legal terms and jargon you will come across. This is where your attention may drift, your frustration may settle in and your desire to just sign on the dotted line becomes too ferocious to stop.

But you cannot be passive about franchise agreements. They need to be carefully reviewed, triple-checked, proofread and analysed by a legal professional. That’s the only way to protect yourself and to know what you’re getting into.

8. Learn about Controls

Many franchisees learn the hard way that they maintain little control over how the business operates. Every owner finds out that what they own is beholden to the corporate head office. The entrepreneur is not free, and they will have their hands tied, even though they are at the shop all day every day.

This is what you can look forward to dealing with:

  • site approval: franchisors will conduct site studies to see if the location will attract customers
  • appearance standards: franchisors will implement a uniform look for all stores, including the clothing of staff
  • restrictions: many businesses will restrict what goods and services you sell; for example, you might not be able to make changes to the menu
  • restrictions, part two: franchisors could also mandate that you stay open during certain hours, require you to use specific software and purchase suppliers from an approved source.

These are the types of controls you need to contend with on a daily basis. It can be limiting and frustrating when you’re an entrepreneur – you started your own business for the freedom! – but the potential rewards may outweigh the headache associated with these controls.

One more thing: at least you get to decide who you want on your team!

9. Prepare a Business Plan

So, you own a coffee shop. You brew coffee, sell it at a markup and post a profit. Surely, it must be that simple, right? Nope. If life were only that easy…

No matter what industry you get into or what company you launch, it is imperative to compose and prepare a business plan. This is a critical component of entrepreneurship because it serves as a blueprint to owning and operating a franchise.

It’s been said before, but it is worth another mention: entrepreneurship without a blueprint is like walking around blind without a cane. You can only become a successful entrepreneur if you know how to plan.

Franchising seems to be a profitable venture. If you go to the middle of a city, you will see five different Starbucks locations in a two-block radius. That’s a lot of coffee.

But franchising isn’t as easy as it looks. Profit margins are slim, franchisor-franchisee relationships can be tense and ownership can be inundated with work, responsibility and new mandates from head office.

Still, the prospect of being your own boss and being surrounded by, let’s say, coffee? That’s intriguing.

Are you thinking about buying a franchise? Let us know in the comments section below.