If you’re ready to start your own business, a franchise is worth considering. Franchises have a higher success rate, at least in the first year or two, than businesses started from scratch. A franchise is right for you if you want the security that comes from partnering with a corporate office and don’t mind the loss of independence it brings.
What Is a Franchise?
Starting a new business takes work. You have to come up with a brand identity, gather funds and market your offerings, among many other steps. A franchise gives you a turnkey solution, with some of the branding and marketing already done for you.
A franchise pairs a franchisor with a franchisee. There are two different types of franchise relationships:
- Business format franchising: The most common type of franchising, this relationship has the franchisee taking on a business’s existing name, products and services. Typically, business format franchising means following well-established policies and procedures. A fast-food franchise is a great example of business format franchising.
- Product distribution franchising: In this franchising relationship, you serve as a distributor for a company’s products. The soda bottling and gasoline industries often have product distribution relationships.
Read More: What Is a Franchise?
How to Buy a Franchise
Before you can join an existing franchise, you first need to narrow down the type of business you want to start. From there, you can research various businesses and look for the one that’s the right match. Pay close attention to the companies whose corporate identity best matches your own personal goals and personality.
Another thing to consider as you research franchise opportunities is the track record of other franchises. Look closely at locations similar to your own. If you’re in a small, northwestern town, for instance, you’ll want to narrow your research to franchises in small, northwestern towns.
Once you’ve found a franchise that matches your needs, you’ll have to study application requirements. Usually, you’ll need to apply and come up with the franchise fees, as well as show that you have the financing to take on the startup costs.
Benefits of Franchising
There are some pros and cons related to going with a franchise versus starting a business of your own. Here are some of the benefits to consider:
- Proven concept: Any startup goes through a phase of testing and researching to make sure the products or services are not only safe but will sell. When you buy into a franchise, that work has already been done for you.
- Recognized name: If you’re buying into a franchise that has an established reputation, a large part of the marketing work is done for you. Even if this is the first location in your area, chances are, some local residents are already familiar with the brand through travel or previous places they’ve lived.
- Bulk discounts: A franchise operation typically has existing relationships with suppliers. Those vendors can offer a volume discount that you wouldn’t be able to access as an individual business.
- Moral support: When you’re part of a franchise, you have a built-in network of colleagues. Your parent company might even have annual conferences or regional meetings to allow you to share tips and interact with other franchisees.
Downsides of Franchising
As many perks as there are with joining a franchise, there are some downsides. These may not be a big deal to you, but for some, they can be dealbreakers. Here are some cons to joining a franchise:
- Reduced profits: The cost of starting any business can be a problem, but with your own business, the profits will come directly to you. As a franchisee, you’ll have to give a portion of the profits to your parent company.
- Eligibility requirements: Not everyone will qualify to run a franchise. You’ll have to jump through some hoops to prove you’re a worthy business owner.
- Required trust: While you will have the benefit of buying into a known brand, the reputation of that brand isn’t entirely in your hands. Your corporate office, as well as the other franchisees in the network, can put that brand name in jeopardy by providing poor service or making a public misstep.
- Lack of freedom: Running a franchise means being accountable to your parent company. You’ll be required to follow their policies and procedures, and they’ll have oversight of how you run things.
Cost of Franchising
Starting a business isn’t cheap. You’ll have to invest money in materials and supplies, as well as inventory and leased space. The cost can vary depending on the type of business you’re starting, but there’s no denying you’ll have to come up with some money.
With a franchise, those expenses are usually somewhat fixed, depending on the type of business. Franchise costs vary, but you’ll usually be expected to spend $50,000 to $200,000 at the outset. This includes franchise fees and your own costs for inventory, equipment, retail space and the like.
Finding a Good Franchise
If you’re ready to start searching for a franchise opportunity, the International Franchise Association is a great place to start. The IFA has a franchise opportunity search tool that will give you a big head start on your research. You’ll first choose your industry, then choose your desired location and investment amount from the filtering tools.
Flexibility can make a big difference in finding a franchise that fits your budget and location requirements. You can open a Little Caesar’s franchise in North America for $355,000 in startup costs, for example. If you have only $75,000, a fitness center called The SuperSlow Zone has franchise opportunities.
Read More: How to Buy a Starbucks Store
Requirements for Franchising
Deciding you want to buy a franchise doesn’t mean it’s yours. First, your chosen business will need to be interested in having a franchise in your desired location. Then, you’ll need to apply and ensure you have the minimum initial investment required of their franchisees.
Requirements vary by company. For a Subway franchisee application, for instance, you’ll apply, review the paperwork, meet with a business development agent, pass a test and, if chosen, go through a two-week training. Subway requires solid leadership skills, a commitment to providing good customer service and a goal-achieving personality, and all of this will be vetted during the approval process.
Getting Franchising Financing
Finding the funds to buy a franchise can be tough, but there are resources that can help. First, check to see if your desired franchisor helps line up financing for qualified applicants. Some might even waive the financing fees. Many lenders will lend money for buying a franchise, and you’re more likely to get an SBA-guaranteed loan with a franchise than a completely new business.
But before you line up the startup costs, it’s important to consider how you’ll afford the ongoing costs associated with running any business. Check to see if the franchisor charges annual fees, but also ask what the typical operating costs are. You’ll need to make sure your location will be able to bring enough money in to cover those expenses, as well as funds for you to live on.
Read More: What Resources Are Available From the SBA?
A franchise can give you a big head start on running a successful business, but it’s important to know what’s involved. You’ll typically need to commit to investing a large sum of your own money upfront in exchange for the materials, supplies and support you need to get started. There will also be ongoing costs that will come out of any profits you make.
- Wiley Online Library: Brighter Prospects? Assessing the Franchise Advantage Using Census Data
- International Finance Association: What Is a Franchise?
- Franchising.com: The Costs Involved in Opening a Franchise
- International Franchise Association: Find a Franchise
- Subway: Your Future in Franchise
- SBA: Franchise Anyone?
Stephanie Faris has written about finance for entrepreneurs and marketing firms since 2013. She spent nearly a year as a ghostwriter for a credit card processing service and has ghostwritten about finance for numerous marketing firms and entrepreneurs. Her work has appeared on The Motley Fool, MoneyGeek, Ecommerce Insiders, GoBankingRates, and ThriveBy30.