Buying a Franchise

Dealership grand opening

A franchise with longevity, a good track record of servicing its customer base, and goodwill and brand loyalty will provide you with a greater chance of success. Even with these advantages, it still makes good business sense to do your homework before entering into a permanent and binding contract.

Do Your Research

Owning a franchise means that you will be responsible for marketing, sales, accounting, customer service, and quality assurance in order for this company to succeed. You have to be ready to wear many hats and perhaps step out of your comfort zone a bit.

You also have to look at your finances. Can you afford to buy a franchise? Will you be able to borrow money and is that feasible for you? Will you be able to survive while you are waiting on the franchise to start turning a profit? Hiring an accountant may help you assess your finances and determine if buying a franchise is a viable option for you.

Looking for an Opportunity

Once you have made the decision to further explore this opportunity, you have to find the right franchise to buy. Research is key here; there is a lot of information available to help you make that choice.

Get Circulars

Each franchise has a document called the franchise disclosure document (FDD) which specifies details about the company. Examples of information that may be included are:

  • Details about the franchise including competitors and license or permit requirements
  • Annual revenues of other franchise locations
  • Names and contact information of current and former franchise owners
  • Litigation history of the company and its executives
  • Bankruptcy history
  • Initial franchise fees and other fees and expenses

This document should be used for preliminary research when looking at potential franchise purchases. You should get one from each franchise in which you have interest. This will give you an enormous amount of information about each organization and can allow you to compare prices - from the amount needed to start to the amounts needed to run the business - between the different options. You also should investigate the franchise territory rules; you don't want to open a branch and have another one open up nearby that encroaches on your customer base.

The actual franchise agreement is typically included in the FDD so you can review that as well.

Arrange Some Site Visits

While you are making the decision between one or more options, you should visit current franchises of each business to get a sense of the environment. Are there many customers? How does the business run? You should also talk to the owners of these franchises if possible. They can give you the day-to-day deal of running a franchise and whether they think it was a good deal or not. If you can find an ex-franchisee, speaking to him or her can give you some ideas about any downsides and why they did not renew their licenses.

Ask the Franchise

Feel free to ask the franchise questions about any area you may have concerns about. Set up an interview and go in with a list of questions like:

  • What are the franchise's expansion plans in your area?
  • How are disputes between franchisor and franchisee settled?
  • Have any franchises gone bankrupt?
  • Is there any financing available from the franchisor?
  • What are the pretax profits of existing franchises?
  • Does the franchisor help select a location?
  • Inquire about all fees - is there any additional money needed besides the initial fee and costs?
  • If you are buying an existing store, ask to look at the books for at least 2 years.

Don't feel bad for asking questions. Buying a franchise is complex and you don't want to enter the contract unclear about any issues.

Legal Advice

An accountant or attorney who specializes in franchises may be able to help you if the documents seem confusing. The attorney can review both the FDD and the franchise agreement and can also point out areas where you might be able to negotiate with the company.

The accountant can set up projections for revenues and costs for your franchise. Since you would be making a binding agreement, having other eyes clarify what you think you understand can be a safety gauge. The money you spend on these sources can be helpful in making your decision.

Finance Your New Business

Once you select your franchise, you have to create your business plan. This document will be important when you go to various lenders to get any additional funding for your purchase.

Finish Your Business Plan

A good business plan contains information about the business you are looking to buy, projected profits and expenses, capital needed, and a good marketing plan. Data about your net worth and credit rating and references may also be included.

Your accountant or attorney can offer assistance with the business plan or you can use software or an online template to help you write it.

Secure Financing

Next you need to find a source of financing. Some franchises offer financing options for prospective franchisees. These plans vary with some companies offering up to 75% of the total debt to offering a loan to cover equipment or the franchise fee. Often the franchise will work with you to help you get the money; the business may even help with the business plan to make your proposal more attentive.

If the franchise does not offer financing, you should look to banks or credit unions for the necessary loans. If you don't qualify for a loan or at a rate that you can afford, you can look for other sources like the Small Business Administration (SBA) for a loan guarantee. You can also look at home mortgages or home equity line of credit, veterans' loans, and friends and relatives for funding. Stocks and bonds may be helpful and in some cases, your IRA may also come in handy - although should speak to your accountant before going this route, as there may be potential tax issues when tapping into an IRA early.

Current Popular Franchises

There are so many franchise opportunities available that you can consider buying. Here are some popular franchises that you can investigate.

  • 7-Eleven: This is the largest franchisor by number of outlets in the world. Veterans get a discount on the initial franchise fee.
  • Subway: This is ranked as the number one restaurant chain with more locations than any other chain.
  • Servpro: This company cleans homes and business after fires and other disasters.
  • Merry Maids: This company provides home and window cleaning services.
  • McDonald's: This popular restaurant has undergone a makeover including new playgrounds and free Wi-Fi. The initial costs can be significant.
  • Jimmy Johns: This dine-in sandwich shop does not offer new franchisees financing but does offer help with set up.
  • Dunkin Donuts: There are multiple opportunities for expansion with this company. The organization has a map on the website with locations of interest.
  • Liberty Tax Service: This is a tax preparation service that only needs a seasonal work force during tax season.

Sealing the Deal

Once you have made the decision and secured the financing, you are ready to purchase your franchise. Buying a franchise comes with certain risks, but you can reduce these risks by doing your homework prior to signing any legal documents.

Was this page useful?
Buying a Franchise