Franchises are an appealing option for aspiring entrepreneurs looking for a lower-risk way to own a business. A recent survey from FranNet shows that over 91% of franchises are still in business after two years, and 85% remain open after five years. Comparatively, roughly 45% of new independent businesses fail within their first five years, and only a quarter of them last for 15 years or longer.
Bear in mind, this doesn’t necessarily mean that success is guaranteed with a franchise, nor is this business model the best fit for everyone. If you’re considering buying a franchise, here are some of the key things to consider before making that investment to make sure it’s the right choice for your finances and future.
1. Franchise and royalty fees.
Like any business model, there are both up-front and ongoing costs associated with owning a franchise. These vary widely depending on the industry and type of franchise that you’re purchasing, from just a few thousand dollars to start a home-based service franchise to a 7-figure investment for some nationally known brick-and-mortar franchise opportunities.
Understanding the costs and ongoing financial commitment is a crucial first step for anyone considering franchise ownership. These can include:
- Franchise fees – A one-time payment made for the initial purchase. This typically includes the rights to use the name and brand, as well as initial franchisee training, opening and operational support, and access to the company’s systems, processes, and equipment.
- Royalty fees – These are ongoing fees paid to the franchisor for continuing support and use of their brand name. This will typically be a percentage of gross sales, though some franchises have flat royalty fees, usually paid on a monthly basis.
- Advertising or marketing fee – Like royalties, these are ongoing fees that are typically calculated as a percentage of overall sales, which pay for the franchisor’s marketing efforts on your behalf
- Supply and equipment costs – Many franchisors require franchisees to carry the same products and use the same equipment in order to maintain consistency across locations. It’s important to understand how much you’ll pay to replenish your inventory, maintain equipment, or purchase new equipment through the franchise.
All of the up-front and ongoing costs will be outlined in the Franchise Disclosure Document (FDD). It’s smart to request a copy of the FDD before you commit financially, to ensure that the purchase is a smart investment aligned with your financial goals and resources.
2. Lifestyle and time commitment.
Owning a business can be a lot of work, and that’s just as true of a franchise as of an independent start-up. Different types of franchise will require a different level of commitment from the franchisee. Some franchisors allow for absentee or part-time ownership, while others require the franchise owner to be actively involved in day-to-day operations.
Before you pursue a franchise agreement, consider your lifestyle and what you’re looking for from the arrangement. Some specific things to think about include:
- The total required time commitment per week from the franchise owner
- Whether you plan to be a hands-on owner or hire a leadership team to run the location
- The typical operating hours of this type of business and the level of flexibility in those operating hours
- The size of the franchise territory and extent of travel that will be involved in running it
- Your non-negotiable commitments outside the business and whether you can easily work the franchise into that equation
There are franchises available for every level of time commitment. Some can be set up for mostly passive income or as a side-hustle-friendly business, while others require a full-time commitment of 40 hours or more per week in order to succeed. Knowing what level of time investment you’re willing to make can help to make sure you’re choosing a franchise that aligns with those expectations.
3. Company history and track record.
The main value of buying a franchise over starting an independent business is that you get the backing and support of an established brand. Researching the history of the franchisor can help you determine how successful they have been in the past, which in turn can give you some insight into your odds of success as a new owner.
The Franchise Disclosure Document is an excellent place to start when you’re researching this information. This document includes information on:
- The franchisor’s background and experience
- How long the franchise company has been in operation
- Prior litigation against the franchisor
- Bankruptcy history
- Past financial performance, earnings, and sales
You can also independently research this information online through sites like the International Franchise Association or Dun & Bradstreet. Along with the history of the franchise itself, consider the experience and track record of the company’s leadership team.
4. Franchisee training and support.
All franchises provide some kind of training and onboarding for new franchisees, but the extent and nature of this training varies greatly between franchisors. The training may be on-site at their corporate headquarters, fully remote and asynchronous, or a mix of the two. Some franchisors provide all of the skills and knowledge a new owner will need starting from scratch in the industry, while others assume that new owners are bringing a certain amount of pre-existing experience to the table.
The quality and extent of the training you receive as a new franchisor can be a major factor in your chances of long-term success, so this is something you’ll definitely want to look into before you buy. Think about your past experience in the franchise industry, too. If you’ve been in food service for twenty years, for instance, you will likely be better prepared to take the helm of a restaurant franchise than someone coming into ownership from another industry.
Along with this initial training, research the kind of ongoing support and education that is provided to franchise owners. Many franchisors have support networks of other franchisees which can be a very valuable resource when you have questions or issues as you grow. It can be a smart idea to talk to some current or former franchisees to get a first-hand account of the type of support franchisees with that company receive.
5. Your market and competition.
There are two sides to the question of market and competition. One is what competition you’ll face from other locations within that franchise brand. Some franchisors provide exclusive territories to their owners. If this isn’t the case, research where there are locations already, and whether you may find yourself competing against a more established franchisee in your area.
Also look into what kind of growth opportunities there are within the franchise space. Some franchisors allow owners to purchase multiple territories, or move up into regional management positions as they gain success with their first location. Consider what your long-term goals are for your franchise ownership. If you are content with a single location, the option to grow beyond your first territory may not be a draw, while others will see the opportunity to expand as a must-have in the franchise they choose.
Along with this, you want to think about the broader market for the product or service that you will be providing. Research what other companies in that niche already exist in your area and how your franchise would fit into that picture. Some competition is actually a good thing—it indicates there is a demand for that product or service in your market. That said, if the local market is already oversaturated with similar businesses, you may find it more difficult to gain traction as a newcomer to the market.
6. Franchise term length, renewal, and exit options.
The term lengths offered to franchisees can be a good indication of how much the franchisor invests in their owners. Most franchise agreements last for a term of 10 years or less, with the option to renew the franchise agreement once that term is concluded. In addition to the contracted terms, it’s smart to research the average ownership length of the company’s current franchisees. A company whose franchisees consistently renew their agreements and stay with the company long-term is a good indicator of their profitability and the support they receive from the franchisor.
Along with the length of the term, pay attention to what other stipulations come along with that. Some franchisors reserve the right to terminate an agreement early should a location under-perform, for example, which may put more pressure on you to begin earning revenue right away. In other cases, franchisees need to sign a non-compete clause, stating that they will not open a similar business within the same market for a designated length of time after owning the franchise.
Finally, consider what your exit options as a franchisee are should the business not prove to be a good fit for your lifestyle or goals. Item 17 of the Franchise Disclosure Document states the terms for franchise renewal, the fees and contract terms of a renewal, and the steps for you to sell the franchise if you choose to prior to the end of the initial term.
7. Your interests and experience.
Obviously, you want to thoroughly investigate the franchisor, their track record, and what they offer to franchisees before making an investment. Just as important, though, is interrogating what you will bring to the table as an owner with the company.
Part of this is your lifestyle and time commitment, as we mentioned earlier. Your interests and prior experience are a factor here as well, though. Like any business, buying a franchise is a long-term commitment, and you want to choose an industry and type of business that you can see yourself working in for years to come. If you haven’t worked in the franchise’s sector before, what is drawing you to it now? Does it align, not only with your lifestyle and skills, but with your passions and interests?
It’s true that every business is going to have its high and low points, and you don’t necessarily need to have a heart passion for the work in order to be successful at it. You should at least choose something that will bring you satisfaction, however, or else it will be difficult to maintain your momentum when challenges arise.
Think about your experience in a general business sense, as well. If you have never managed a team of employees, that is an additional skill set you’ll need to learn in order to successfully run a franchise that requires them. If leadership isn’t your strength, it may be better to buy a franchise that can be run as a one-man team, or to budget for hiring a general manager to handle that aspect of the operations, depending on your financial resources and revenue goals.
Like we mentioned in the intro, buying a franchise often offers higher odds of success than starting a business from scratch, but you still want to be discerning before making an investment. Considering these seven factors before buying a franchise is the best way to set yourself up for long-term entrepreneurial success.
