Starting your own business is a daunting and challenging process where risks are at an all-time high. One wrong move and you may have lost most or all of the money you put into the business.
However, there is a way to have your own business without going entirely alone, and that is starting a franchise business. Starting a franchise is business ownership, but with fewer risks and more potential for gains. Most franchise opportunities come from large, established corporations looking to expand their local reach.
If you’re interested in breaking into the franchise business, this blog post is for you! We’ll help you understand the basics of franchising, the risks, and the benefits. We can even help find the perfect franchise opportunity for you.
What Is a Franchise?
Franchising is a business model in which the parent company or franchisor grants a license to another individual or entity known as the franchisee. This license and franchise agreement permit the franchisee to use the franchisor’s established name, products, services, and trademarks.
Franchising opportunities are spread across various sectors. From the fast food and convenience store industry to retail and healthcare, you can find every possible option in franchising. However, the most profitable franchises tend to be in the food and beverage industry.
What Are the Different Types of Franchises?
Franchises are typically divided into five categories, depending on the relationship between the franchisee and the franchisor. These are:
- Job Franchise: This is commonly a low-investment franchise that costs a few thousand dollars. It is usually a home-based opportunity you can run by yourself or with a small team. Some examples of this model are cleaning and maintenance services, plumbing, event planning, travel agency, etc.
- Investment Franchise: This type of franchise requires a significant initial investment and high operational costs. It can include national brands such as restaurants, hotels, health clubs, and convenience stores.
- Distribution Franchise: This type of franchise is also known as a product franchise. It allows the franchisee to obtain products from the franchisor and distribute them in a specific territory. This model is most commonly used by famous distributable brands (i.e., Pepsi, Coke, Exxon, Goodyear Tires, etc.).
- Business Format Franchise: This popular type of franchise requires a comprehensive system to be followed by the franchise owner. The franchisor provides training, support, and resources for the successful operation of their respective business units. Examples include McDonald’s, Subway, and Dunkin’ Donuts.
- Conversion Franchise: This franchise is for established businesses that want to convert their existing business into franchises. The most common example of this model is the conversion of a family-run business into a franchise with multiple locations.
Prospective franchisees should be aware of the different types of franchises and pick one that matches their business goals. The best franchises to invest in are those you can commit to long-term.
What Are the Pros and Cons of Buying a Franchise?
You can reap many benefits from investing in a franchise business model. However, there are also several risks you should be aware of, as risks are an inherent part of any business. Here are some of the pros and cons to consider before diving into franchising:
Pros:
Established Brand
Unlike starting your own business from scratch, a franchise offers you the opportunity to join a well-known company with established brand recognition.
This means customers expect a certain level of quality and will be more likely to purchase from your franchise as they trust the parent company’s name and store-brand products. You’ll need to put in minimal effort to market to your target audience and will have excellent support systems already in place.
Operating Procedures Are Established
Franchise businesses follow a proven business model and proven operating system from their parent company. This means you don’t have to worry about reinventing the wheel when setting up your business.
Everything from policies and procedures to marketing and operations will already be set up for you.
Existing Customer Base
With an existing customer base, it’s easy to build on the parent company’s success and attract more customers. It is particularly helpful if you start a business in an unfamiliar industry or location. This is what makes a franchise profitable, especially for new business owners.
Most of the Marketing Comes From the Headquarters
Developing a comprehensive and effective marketing strategy is a problem many new businesses face. With franchise businesses, most of the marketing will be done by the parent company’s headquarters.
This means franchise owners can focus on providing high-quality services while the parent company takes care of all the promotional activities. All you’ll have to do is live up to the advertising and spread the word in your own community.
Cons:
High Initial Costs
One of the most evident downsides of investing in a franchise business is the high start-up costs. You’ll have to pay franchise fees, royalties, and other expenses related to the brand’s infrastructure. The amount you’ll be required to pay will vary from franchise to franchise, so you must research before investing in a franchise business.
Lack of Flexibility
Although you can call your franchise your “own” business, you are not entirely your own boss. You’ll still be required to follow the franchisor’s rules, systems, and policies, which may go against the notion you have of entrepreneurs being their own boss.
However, starting under the wing of a franchisor can give you the experience and knowledge to become a successful business owner.
Franchise Fees
Franchise fees are your most significant source of expenses in franchising. The fees will depend on the franchise you choose and your agreement with the franchisor. Expect to pay recurring fees such as royalty payments, advertising funds, and other costs related to being a franchisee.
What Are the Qualifications to Buy a Franchise?
After reading the pros and cons, you should carefully evaluate if this business format is the perfect match for you. If you still want to consider franchising, here are some of the qualifications you need to prepare to secure a franchise unit:
- A good credit score: The franchisor will likely review your credit score to assess your financial capability to manage the franchise business. Franchisors will probably look for a score of 700 and above.
- Your net worth: Depending on the parent company’s size, the franchisor may require a minimum net worth from you. This requirement ensures that you can sustain the operating costs of the business in case of losses.
- The amount of money you have: Your available cash or liquid asset may determine the type of franchise you can acquire. Although there are financial aids and solutions to help you start a franchise with a lower initial investment, the franchisor may consider your cash assets before agreeing.
- Relevant skills and experience: Many franchisors would prefer that you have experience in the industry or related experiences. For example, having prior work experience in the food service sector is beneficial if you are looking to open a restaurant franchise.
- Personality and drive: Lastly, franchisors look for people with great personalities and a strong drive to succeed. They want someone who can be their brand ambassador and follow the franchisor’s system in running the business.
Requirements may differ from one franchisor to another, so make sure that you carefully read the franchise disclosure document (FDD) for detailed requirements.
If you’re still looking for a franchise opportunity, you can contact Armen Nazarian Business Brokers to help you find the perfect franchise for you. We’ll conduct a franchise business review to make sure you know exactly what you are getting into with each franchise opportunity.
What Are the Fees Associated With Buying a Franchise?
Before diving into franchising, consider the various fees associated with owning a franchise. These include:
Franchise Fees
You will use the brand’s name, products and services, trademarks, operational systems, and more when franchising. The brand already has an established reputation and customer base, so you will have to pay a franchise fee for the rights to use the brand’s business model.
Accounting and Legal Fees
Before investing in a franchise, you should have an experienced accountant and lawyer who will help you understand the financial and legal implications of owning a franchise.
An accountant can help you set up books and records, analyze your finances, and make a business plan to help ensure that your franchise is profitable.
Additionally, an attorney knowledgeable in franchise law can help you review documents and agreements and handle any legal aspects of the business.
Working Capital
Working capital is the money that covers day-to-day operations and ensures that the franchise is running smoothly. It usually covers your rent, payroll, insurance, marketing, and other expenses.
Build-Out Costs
These costs cover the expenses of setting up your franchise. They include the costs for construction, architectural planning, equipment, furniture, contractor fees, decorations, security, landscaping, local zoning fees, and other expenses.
Supplies Costs
Depending on the type of franchise, you will need certain supplies and materials to operate the business.
For example, if you own a food franchise, you’ll need to purchase ingredients, kitchenware, equipment, table settings, cutlery, cleaning products, uniforms, office supplies, and much more.
These costs can add up quickly, so it’s critical to factor them in when considering franchising.
How Can a Business Broker Be Helpful in This Process?
A business broker can provide significant assistance when buying a franchise. An experienced broker has in-depth knowledge and experience in the franchise industry, which can help you find the best franchise opportunities for your needs and goals.
They can recommend affordable franchises with high franchisee satisfaction ratings or introduce you to new franchise opportunities from top franchises. They can also help set up a business plan, negotiate with franchisors, and handle necessary business documents.
If you’re considering buying a franchise, having a business broker can be an invaluable resource. They’ll help you find the best opportunities for your business needs and goals. They can also help streamline the process and maximize your chances of success.
Contact Armen Nazarian Business Brokers to Find the Perfect Franchise Opportunity
Franchising is a promising opportunity for aspiring entrepreneurs or experienced business owners looking to add another financial channel. Our team at the Armen Nazarian Business Brokers can help you find the best franchises for sale!
With over 3o years of experience, we have an extensive network of franchisors to help you find the perfect opportunity. We utilize our vast knowledge of the industry and provide personalized guidance and advice every step of the way in order to make sure that you’re getting the best deal possible.
Contact us today and get your journey toward franchising and entrepreneurship started!