With franchising, an entrepreneur can open a ready-made business. The business will have its branding in place. But before you decide to purchase a franchise it is critical to understand what a franchise is and how it differs from a chain. You can expect to pay anywhere from $10,000-$100,000 when buying a franchise plus monthly marketing and royalty fees. In this article, we would like to give you some guidance with facts you will need to know before purchasing a franchisee.
What Is The Simple Definition Of A Franchise?
A franchise is a business whereby the owner licenses its operations—along with its products, branding, and knowledge—in exchange for a franchise fee. The franchisor is the business that grants licenses to franchisees. The International Franchise Association defines a franchise as a “method of distributing products or services involving a franchisor, who establishes the brand’s trademark or trade name and a business system, and a franchisee, who pays a royalty and often an initial fee for the rights to do business under the franchisor’s name and system.”
What Is The Difference Between Chaining And Franchising?
In a chain business, a parent company owns all of the business locations. Whereas as part of a franchise, different stores or branches are owned by separate individuals, who are in charge of running them. Franchises are typically owned by local individuals. Chains are not. Chains are owned by corporations and do not sell the rights to use their brand name and proprietary systems. Examples of chains include Chipotle and Best Buy. A franchise is owned by a franchisee, whereas a chain store is owned by a parent corporation.
9 Steps To Buying A Franchise
Follow these steps to get started if you are considering buying a franchise…
- Be sure you are certain – Owning a franchise can be a large undertaking. Business ownership, in general, comes with its challenges.
- Get your franchise education – You’ll find countless articles, books, and videos online, but, early in your education, it is best to avoid information that is designed to sell you a specific franchise. The purpose of a franchise education is not to sell you a franchise, but to help you determine if franchising is a good choice for you, and if it is, to show you how to find and investigate appropriate franchise opportunities. The International Franchise Association is a good source of educational information. You can also learn about franchising at seminars.
- What kind of franchise best suits you? – Once you know the type of franchise you want to buy, and the work environment that you prefer, you’re likely to find dozens of suitable opportunities in franchising. Look for the following criteria…
- Choose a franchise that has proof of profitability.
- Choose a franchise that is in a market that is growing.
- Choose a franchise that is socially responsible.
- Choose a franchise that does not have lots of competition in your location.
- Choose a franchise that has an opportunity for upselling products.
- Choose a franchise that has excellent marketing and support.
- Choose a franchise that will allow you to shadow an owner.
- The franchise application process – The initial franchise application process is a screening mechanism by which franchisors begin to determine your interest and qualifications. Franchisors will look at your finances, background, location you want, and why you are interested in their franchise.
- Attend the Franchisor’s Discovery Day – After receiving a federal disclosure agreement, you will have the opportunity to meet the franchisor’s management team personally during discovery day, which typically takes place in the franchisor’s head office. This is the chance for both the franchisor and potential franchisee to get to know each other and ask questions about anything that will affect the success of the business.
- Find a location to buy or rent – Once your financing is approved and your franchise paperwork is all filled out, it is time to find a commercial space.
- Take the necessary training and workshops – The next step is to take all the necessary training and workshops to equip you and your staff with the skills and knowledge necessary to run your business. The franchisor typically will provide the training sessions, which will take place in their headquarters, at a franchise location, or virtually and will usually last for one to two weeks. Typical training sessions will cover everything you need to know, including the franchise’s products and services, the systems you’ll be using, and the policies and guidelines you need to put in place. Some franchisors offer training in marketing, negotiating with suppliers, hiring and managing employees, filing permits, bookkeeping, creating reports, and more. These sessions will likely combine classroom lessons, hands-on work, and on-site training with equipment and systems.
- How much money can I make by owning a franchise? – This depends on a few factors. Do you have a loan payment? How much are your taxes? Do you have any required business reinvestment costs? Those must be paid before you can pay yourself. Franchise Business Review found that the top 18% of franchise owners make more than $200,000 each year. To get more info about how much money franchise owners make you should ask a few franchise owners. A few questions could be…
- What was the average income each year since the franchise’s inception?
- How much were you able to pay yourself?
- What were some of your unanticipated expenses?
- What do you think is a realistic amount you think I can make from my franchise?
- Should you hire a franchise attorney? – You should hire a franchise attorney before you buy the franchise. They will be a great resource during the due diligence process and for drafting and maintaining the franchise disclosure document which is required by law. Hiring a franchise attorney is important because, when it comes down to it, their real job is to protect you. It’s one thing for them to explain the legal documents in franchising. It’s quite another to advise you. A good franchise attorney will offer their opinion on the feasibility of your potential new venture. Franchising is a very regulated industry, it is critical to have counsel who is familiar with the franchising industry.
Owning a franchise can lead to a fulfilling career, but before committing to opening a franchise, be sure to do your due diligence.
Contact Aaron (608-576-4592) for a Free Consultation!
About Aaron Bakken
Franchise Consultant for The Franchise Consulting Company
Aaron has 20+ years of franchise and independent business ownership experience. He also spent 5 years as the VP of Franchise Development for an international franchise group, growing the franchise to the advent of a private equity buyout. Whether you are looking to buy a franchise opportunity or franchise your business, Aaron knows how to guide you.
No Cost To You
Aaron is paid by franchisors and development companies for bringing them viable franchise investors. So frankly, his clients have nothing to lose by engaging with him but a bit of their time. Aaron helps his clients navigate the complex world of franchise ownership and development and provides long term guidance to help his clients achieve their entrepreneurship goals.