In the eyes a potential business owner, an ideally-located, well-managed franchise is beautiful to behold. Serviced by friendly employees in crisp uniforms, customers entering and exit all day long, exchanging their hard-earned money for the cozy familiarity and uncomplicated convenience of a trusted and well-known establishment. As consumers we’ve all felt the pull of a franchise whose commercials are on every TV, whose stores are in every state; a business we’ve patronized countless times because it gives us what we want, when we want it, as regularly and predictably as a clock.
For those who are eager to open a business but hesitant about taking on the hassle and uncertainty of building a reputation from nothing, buying a franchise may seem like the perfect solution. If success breeds success, there can be no securer feeling for a new business owner than to know that they’re starting out with decades of experience and millions of satisfied customers built into the very walls of their establishment.
Nothing is easy, though, and while buying a franchise can be a lucrative, long-lasting investment for many, it has also been an expensive dead-end for others. Here are some tips on how to open a franchise and how to do it right.
Look at the long term
Before you take on the expense and responsibility of a buying a franchise, you should know that it is exactly what you want—not just now, but twenty years from now. It is impossible to predict the future with total certainty, but you should at least feel confident that, among your business ambitions, opening a franchise has no close competitors. Opening a franchise, for example, is not a practical solution to paying for a future degree in journalism or veterinary medicine. It is an all-consuming, costly, and potentially very rewarding venture in and of itself, and if you buy a franchise in the hopes that (career-wise) it will serve a higher purpose, you’ll be doomed from the get-go.
Planning to open a franchise
Once you’re convinced that opening a franchise is your topmost priority, you must research and plan as if your life depended on it—because it does. Here are some questions to ask yourself as you’re planning your future franchise:
- How much will it cost? When payroll, rent, equipment and inventory, interest on loans, business insurance, etc., are taken into account, what kind of capital will your new franchise require—not just to open, but to stay in business even when business is slow?
- Who is my franchisor? How enthusiastic is your parent company when it comes to supporting you during the make-or-break years of your franchise? You can’t rely on their word alone; as with a car salesman or realtor, it all comes down to due diligence. What exactly is your parent company offering in terms of marketing, setup, and beginning operations?
- What is my business plan? Once you’ve estimated the costs of your franchise, and know to a certainty what to expect in terms of support from your parent company, you must sit down and write a business plan. You’ve counted the costs; what are your projected returns? Remember, the more carefully you take this step, the more likely an investor is to take you seriously. Without a serious business proposal in hand, your chances of winning financial support from a responsible lender are less likely.
- Where are my disclosure documents? Franchisors are required by law to provide the potential franchisee a detailed disclosure packet at least 10 days prior to closing the deal. This is part of the FTC’s Franchise Rule and Business Opportunity Rule mandate. Avoid scams by making sure your franchisor provides this in its full detail.
Funding a franchise
You’ve picked the right franchise, found the right parent company, and developed the perfect business plan. Now, where will you find the money to move forward? Joel Livaba, aka the Franchise King, recommends investing up to 15% of your own money (net worth) into a start-up franchise. For the very lucky, that may be enough, but for most of us that means exploring other financing methods to cover the rest of the venture.
Let’s look at a few options for funding your new franchise.
- Your franchisor. Check with your franchisor first to see if they offer funding for new or existing locations. Some franchisors may even offer a loan with a very low intro APR, so a franchisor could be an inexpensive option. If they don’t, they may be able to refer you to an online lender with which they have a relationship.
- Traditional banks. Banks are solid, dependable institutions, but they’re also picky and cautious about who they’ll work with when it comes to small business lending. Banks and credit unions do offer funding for franchise purchases, so if you have a great relationship with your bank and excellent credit, both personal and business, banks are a good place to start.
- Small Business Association (SBA) loans. The SBA is a federal agency dedicated to helping small business owners build and improve their businesses. The SBA provides loans through banks and financial institutions. These loans are partially guaranteed by the government, thus, in the eyes of the banks offering them, SBA loans have the reputation of being less risky than traditional loans. SBA loans are offered to established businesses and new businesses, but you’ll have to meet basic requirements (for example, you must have a FICO SBSS business credit score of 140 or above to prequalify).
- Online franchise lenders. There are a whole slew of lenders looking to fund both franchises specifically and small businesses in general. Franchise America Finance in one such lender offering start-up franchises loans between $150,000 – $2M. ApplePie Capital is another; they offer franchise loans through a peer-to-peer marketplace up to $1M.
Opening and funding a franchise are not easy tasks. For those who put in the time, sweat, and planning, however, the rewards can be life-changing.
This article was originally written on December 23, 2015 and updated on June 16, 2022.