When starting a new business, one can either go with the safer choice of investing in an existing franchise or taking the risk of starting from the ground. Franchises are considered more stable than jumping in headfirst without proof that they will succeed. However, even after choosing a safe route and going with a proven business model, there can still be a failure and things not working out.
Like every other business, there are many things that one has to consider before starting a franchise. Franchisees are deemed to raise more profits as the franchisors aim to protect their brand awareness, and for that to happen, they provide continual support to the franchisees. But this does not mean all franchisees make profits.
The article will guide you if you wonder how to buy a franchise. First, you should know franchising and its benefits. Then, you should identify the right franchise that suits your business needs.
Hi, this is Dan Rowe from Fransmart. Our website gives you all the details you need to buy a successful franchise business. Whether you want to buy a healthy menu Greek franchise, a fast-developing profitable sandwich franchise, franchise opportunity as a Cashpoint, or an award-winning franchise with low risk and capital, we have information on everything. We also aid you in finding the ideal fit for your skills and experience and how to finance your new franchise.
Here we will help you understand the proper procedure for buying a franchise and give you insight into how following the right approach can help you grow multifold.
Why Owning Franchise Is a Good Plan For Business
First thing first!!! Watch this Video
A franchise business is a system in which the franchisor who owns the company licenses his brand name, operations, products, knowledge systems, and assistance in return for periodic payment of franchise fees and royalty fees. The person who gains the right to operate and pays the fee for the franchise is known as the franchisee.
A franchise business is beneficial for both the parties, the franchisor and the franchisee.
Franchising is a good way to expand a business. However, there are also some disadvantages and advantages to franchising. For example, the expansion process can be slow, and it’s not easy to find franchisees for every region. Companies that franchise also face various risks, including reputational damage and litigation issues.
A franchise system does not only help franchisors but can also help existing or new entrepreneurs. Buying a franchise includes many advantages like low risk, brand name, knowledge of operations, training sessions, customer trust, and staff support.
There are two types of franchising territories that you can buy. The first kind is an existing franchise, where another franchisee already owns the territory. The second kind is a new franchise, or territory, that has been created especially for you. Before deciding on which to purchase, please look at this list of pros and cons of buying a franchise.
Step-by-Step Process On How To Buy A Franchise
As your time and money are on the line when you purchase a franchise, you must be wary of all the options available in the market. To assist you in buying a franchise, we have provided a step-by-step procedure to buy a franchise that will save your time and money.
#1 The first step to buying a franchise is initial research.
The most effective way to ensure that you don’t rack up any unnecessary expenses during your franchise purchase is to do a good amount of research beforehand. It will help you to understand the business model and requirements. We have shared complete information to identify whether you should or should not buy a franchise. Before moving to the next step, take a moment to read this.
#2 The second step after the research is to evaluate individual franchise companies
Each franchise is unique, so it is crucial to understand what you are buying. An in-depth investigation should include information from the franchisor, past and current franchisees, and third-party sources.
Before you sign on the dotted line, it is crucial to evaluate the strengths and weaknesses of your chosen franchise system. We have compiled a list of questions to gain valuable intel on your franchise.
You can also discover much more information about your franchise opportunity by talking with us to minimize risk when buying a franchise.
#3 Third step is Fulfilling Franchise Eligibility Criteria
Franchisors set minimum experience and business acumen requirements for the franchisee, ensuring that only the people with the requisite business acumen manage their franchises. Some franchise agreements enforce a multi-unit ownership structure to ensure any franchisee will be successful in the long run.
This is because a franchise’s success or failure directly affects the franchisors, impacting their brand’s goodwill and business. Run a filter among selected franchises to determine what best suits your eligibility.
Do you have no money and still want to buy a franchise? Well, it’s possible, the secret is here!!
#4 Submitting Request for Consideration/Application is Fourth Step
The next step is to request a franchise disclosure document from the companies in your target industry after screening them based on your preferences. You should receive information back from them within a week (or less) by email or telephone. After reviewing the FDD, make sure you have all of your questions answered, then choose the franchise that’s right for you.
If you are still sceptical about the chosen industry, read this article on Which franchise Industries are trending.
The decision on the brand of industry and franchisor is crucial to the success. Make sure the information you are receiving from the company, rep, sales team, franchisee, etc., is honest and not just invented.
If there are any questions or concerns about which franchise industry for you, please get in touch with us today.
#5 Analysis Franchise Disclosure Document Before Signing the Dotted Lines
After submitting a qualification questionnaire, the franchisor will provide you with the franchise disclosure document (FDD). The FDD contains essential information regarding the franchise. Analyze this document carefully, especially FDD item 19, and if you have questions like how much a franchise owner earns, watch the video.‘
Also, before you sign the franchise agreement, make sure you have taken an independent legal opinion and are aware of all the clauses in it.
Are you not aware?
Don’t blindly sign anything just because a franchisor or a salesperson tells you to; always seek professional advice before signing contracts.
#6 Next Step is to Wait in the Disclosure period
It is essential to make an informed decision about whether or not to buy a particular franchise. The franchisors will provide you with a 14 day disclosure period. During this period, the franchisee cannot sign the franchise agreement. An informed decision about buying a franchise is only possible if you carefully analyze and examine the disclosed materials.
And for that Franchisee should follow these steps during the disclosure period:
a) Visit Existing Franchisees
The most reasonable way to get information about any franchise is to visit existing stores. Contact them and clear all your doubts about the business and the relationship between franchisor and franchisee. It is the best source to learn about their lives as franchisees and evaluate how well a franchisor supports them.
b) Visit Franchisor
Suppose you are satisfied with everything and about to make a deal with that company. In that case, it is essential to have acquaintance with the people who will be helping you to run your business successfully. If you have any more doubts, you can clear those with them, and they will also be evaluating you as a potential franchisee.
c) Finalize
After completing all the steps mentioned above, it is time to take your final decision. The last step is to sign the franchise agreement and make it official with the heads and key executives who will work with you as a franchisee. If you have carefully followed this process, then congratulations! You are now into a franchise business.
#7 You need to Pay the Initial Cost and Franchise Fees now
According to Entrepreneur, the initial investment to buy a franchise can range from $50,000 to $500,000; this includes startup costs like signage and product samples and business equipment like computers and product display racks. It depends on the kind of business you want to buy. You also pay between 6% and 10% of your gross sales as ongoing royalties along with a franchise fee.
Buying a franchise is a hefty investment. There are many costs and fees that you can expect when you buy a Franchise. Let us brief you on the main expenses and costs involved when opening your franchise.
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Franchise Fees
A franchise fee is the entry cost you’ll pay to the company, also known as the initial fee. It has many different ranges and varies across industries and brands. This one-time fee allows you to use the brand, trademarks, system, and other things needed for operating.
Even if you can pay up the franchise fee, it does not mean you are eligible to buy that franchise; there are still a few requirements you have to fulfill, such as your liquidity and net worth.
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Royalty Fees
The franchise owner has to pay a monthly royalty fee to the franchisor. It is like an ongoing membership charge to remain part of the franchise. Every company has a different scheme of their royalty fee. Some companies ask for a fixed amount, while others ask for a percentage of the sales.
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Construction Costs
Once your deal is final, you will have to start the construction of the building. This construction part will require a lot of investment, such as you will need to hire a construction firm, a real estate agent, and even an interior designer in some cases. Some franchisors offer logistical support, but you will have to manage everything in most cases.
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Materials and Equipment Expenses
For setting up a running and operational outlet, you will have to buy equipment that the franchising business needs. Miscellaneous expenses are probably the part where you’ll most likely spend the most. Whether you buy a franchise of a product industry or a service industry, you will need to purchase equipment like computers, LCDs, air conditioning, heaters, furniture, and fixtures.
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Operational Costs
Many expenses are involved in your day-to-day operations if you open a business. You need to pay for your employee’s salaries, electricity, rents, uniforms, utilities, supplies, and even maintenance. There are other additional expenses, such as paying professional fees for advisors, lawyers, or consultants.
Why Is It Important To Follow The Correct Procedure To Buy A Franchise?
It is essential to follow all the steps to buy the franchise because if one does not follow those steps correctly, they could end up with a failed franchise. Just investing in any franchise will not get you profits. Like every other business, franchises should calculate ROI and know how much franchise owners can make. If it is not identified correctly, it could be too late for you.
- You could end up investing in multi-unit franchises that will be dead in the future. They might be making good profits right now but do not have any scope in the future. Be assured by appropriately choosing among multi-unit or single units, as per your capabilities.
- Without proper guidance, you could also invest in franchises with less return on investment than other brands in the same sector.
- Without the proper knowledge of the procedure, you could end up with a franchise at the wrong location. The franchise may not give you the profits it would have if opened at a suitable place for that franchise. Hence, finding a good franchise location is a must for smooth running.