How to buy a franchise business
Buying a franchise can be one of the fastest and easiest roads to business ownership. It’s a great option if you're looking to invest in a proven business model that comes with support from the franchisor. Decide if buying a franchise is right for you. Here’s the simple process:
Define - Determine what you want and need out of a business opportunity. This will help you narrow down your search for the perfect franchise. Search - Take time to carefully review all the franchise opportunities available to you before selecting a franchise to buy.
Research - Do your due diligence by getting to know more about the franchisor and speaking to existing franchisees, if possible. Thoroughly review the franchise agreement. Make sure you fully understand all the costs involved. It’s wise to have your attorney review all franchise documents as well. Funding - If you don’t have an adequate cash reserve on hand, you’ll need to arrange funding to buy the franchise. In some cases, franchisors will fund your purchase directly, so consider that option as well.
Buy - Once you (and your lawyer) are comfortable with the franchise arrangements, you simply need to sign on the dotted line and start running your turnkey business.
How to acquire a franchise business
Where to buy a franchise
If you don’t have a specific franchise in mind, an online franchise listing service is the best option if you want the widest range of available franchises. Spend your time going through what is available so that you can narrow down what franchise will be the best fit for you. You can use various filters in order to whittle the options down. Spend your time researching the options that are right for you. You can filter your options by price, location or type of franchise. If you already know which franchise you want to buy, you may be able to get more information directly from the franchisor’s website.
I want to buy a franchise, where do I start?
First, decide if buying a franchise is right for you. If you decide it is, buying a franchise is a fairly simple process:
- Determine what you want and need out of a business opportunity. This will help you narrow down your search for the perfect franchise.
- Take time to carefully review all the franchise opportunities available to you before selecting a franchise to buy. If you need help finding franchising opportunities, Businesses For Sale can assist you.
- Do your due diligence by getting to know more about the franchisor and speaking to existing franchisees, if possible.
- Make sure you fully understand all the costs involved.
- If you don't have an adequate cash reserve on hand, you’ll need to arrange funding to buy the franchise. In some cases, franchisors will fund your purchase directly, so consider that option as well.
For more information, see How to Buy a Franchise.
How much does it cost to buy a franchise?
There are hundreds of franchise opportunities available with an equally wide range of prices. Some popular franchise operations can cost hundreds of thousands of dollars between initial franchise fees and startup costs. Others may cost a fraction of that. In the U.S., the average initial franchise fee is around $30,000. It completely depends on how large and involved a setup process is required, and how popular or in-demand the franchise brand is.
The costs involved in buying a franchise will include the initial franchising fee, the set-up costs (such as real estate, equipment, vehicles, etc.), and, legal services. After that, there will also be an ongoing monthly franchising fee covering royalties and a fee for advertising.
How to get money to buy a franchise
There are several options when it comes to financing a franchise: Franchisor financing - Often, these organizations will have tailored financing options available for potential franchisees to take advantage of. Of course, work with your lawyer and accountant to confirm this is the best option for you.
Banks - You can also get a standard commercial bank loan. To secure a business loan, you’ll need to have a business plan in place. Also, your personal credit rating (or that of your partners) may be taken into consideration.
Small Business Administration (SBA) - This U.S. government agency offers many different funding options for small businesses. Learn more here.
Friends or family - This one carries potential complications, but if the circumstances are favorable, it can be an easier and faster road to funding. If this is the option that you choose, make sure you have the terms in writing to prevent any problems down the road.
How to sell a franchise
If you decide to sell your franchise, you will need to work with the franchisor to coordinate a sale and transfer of the franchise rights and obligations. Find out what they charge for transfer fees, and what qualities the franchisor is looking for in a franchisee (since they will need to approve the buyer). Work with the franchisor and your own team of advisors to determine the value of your franchise.
You will then need to market your franchise for sale. You can advertise it through an online marketplace like BusinessesForSale.com, or you can go through a broker. In some cases, your franchisor will market the sale for you, but you’ll want to make sure their plan aligns with your own.
How long is a franchise agreement?
The length of a franchise agreement varies with each franchise. Agreements can last anywhere from five to 20 years, although 10 or less is most common in the U.S. You’ll want to make sure your contract lasts long enough for you to recoup your initial investment, but ideally it won’t be much longer than that. Once that contract period is up, you and the franchisor can discuss new terms when you renew.
How much do franchises make?
According to Entrepreneur Magazine, the average profit earned by franchisees in the United States is $66,000 annually. But, in reality, that’s far too generalized to be of much value. The exact amount that you can make as a franchisee depends on a number of factors, including the franchise you buy, the cost of doing business at any given time, and how efficient an operation you run, among others.
A good accountant familiar with small businesses should be able to offer realistic expectations before you even buy your franchise so you can make an informed decision before investing. After the purchase, the real key is smart management.
How do I sell my franchise US?
Can a franchisor be a franchisee?
It's not possible for the same person or company to be both the franchisor and the franchisee of the same franchise operation. The franchisor sells the franchise opportunity to the franchisee. The franchisee buys the right to open and run a franchise using the franchisor’s systems, branding, and knowledge.
That being said, there is no reason the same person or company can’t be both a franchisor and a franchisee in two different businesses.
How are franchise fees calculated?
Every franchise will have slightly different methods for calculating franchise fees, so it’s important to review the franchise agreement thoroughly and make sure you fully understand how fees are calculated for the franchise you're researching.
In general, the initial franchise fee purchases the use of the brand name within a geographic territory and the training and other startup assistance you receive. Ongoing marketing and royalty fees are usually calculated as a percentage of the monthly or annual revenue. On average, ongoing fees range between 4% and 12% of sales, with higher-revenue business models requiring lower percentage fees.
Can you negotiate franchise fees?
Generally, franchise fees are non-negotiable. To provide consistency between all franchises under a brand, franchise opportunities are offered to all franchisees with the same terms and conditions. And, the government’s disclosure requirements factor into the transparency of franchise fees. However, one area where you may have room to negotiate is the size of the territory your fee purchases. Working with an experienced broker or lawyer familiar with franchise agreements can aid in this effort.
What happens at the end of a franchise agreement?
When you agree to and sign the franchise agreement, it includes a length of time during which the agreement is in force. When that period ends, you will either need to renew your agreement or terminate it.
If you choose to renew (and the franchisor is happy with your performance) you shouldn’t have any trouble renewing your contract. Be aware, however, that the franchisor has the right to update the new agreement with new terms and/or fee requirements. These may require some expenses soon after renewal, such as mandatory refurbishment or replacement of equipment.
If you choose not to renew your franchise agreement, most contracts require at least 6 months’ notice to the franchisor prior to the termination of your franchise agreement. Upon termination, you will need to stop doing business under the franchisor’s brand and legally separate your company from the franchise. It's also important to note that many franchise agreements prohibit you from owning or operating a business that competes with your former franchise, at least for a period of time.
What are the pitfalls of franchising?
All the benefits of buying a franchise can also be drawbacks:
Buying a franchise means tapping into the systems, processes, and regulations set up by the franchisor. For some entrepreneurs, this is a fast track to success. For others, though, it takes away much of the joy and challenge of starting a business.
Owning a franchise also means you will always pay fees to the franchisor, not just when you open. There will never be a point where you recoup your initial investment and every bit of profit from that point forward is yours to enjoy. When you own a franchise, the brand’s success is your success. When the parent company is doing well, this is a powerful asset. However, conversely, if the reputation of the brand suffers, so will you. And, there’s not much you can do about it.
That's why it's vital that you decide if franchising is right for you before you make a purchase.
Can you walk away from a franchise?
With a business you own free and clear, you have the freedom to shut it down whenever you’d like. As a franchisee, you have a contractual obligation to the franchisor for the full term of the agreement.
That means if you need to walk away from the business, you will first have to find someone to buy the franchise from you. Doing so can sometimes be challenging because the franchisor will have to approve the new franchisee before the sale can go through. Working with a business broker familiar with franchising can help mitigate this challenge, and listing your franchise for sale on BusinessesForSale.com can provide the exposure you need to locate a qualified buyer.
Depending on the terms of your franchise agreement, you may also need to pay a transfer fee, so this needs to be factored into your plans as well.
Can a franchise owner be fired?
Yes and no. As a franchisee, you cannot actually be fired because you legally own the business — you’re the boss. However, a franchisor can terminate the franchise agreement, which means your business would cease to operate. This would only happen in extreme circumstances, especially if the franchisee is in breach of contract. So, as long as you’re following the rules, you should be able to count on job security.
What happens if a franchise goes out of business?
This answer depends on a number of factors:
Is the franchisor actually permanently closing its doors? Or is it going through a bankruptcy, restructuring, or other temporary situation? If it’s one of the latter, your day-to-day operations, fees, and other details may be unchanged. You’ll likely receive detailed instructions from the franchisor or whoever is administrating the legal proceedings.
If the franchisor really is going out of business — and especially if it happens suddenly with little or no communication - you could find yourself in a difficult situation. Optimally, the franchise agreement will stipulate detailed exit instructions in the event of a closure, but most do not.
Without clear direction from the franchisor, the best option is to seek legal advice from an experienced franchise lawyer. In the meantime, depending on how the franchise arrangement is set up, you may be able to continue operating with some minor adjustments.
What is the cheapest franchise to start?
There are plenty of low-cost franchises that you can choose from. The best bet is to use the Advanced Search filters on our site to filter the currently listed franchise options by price. Once you have narrowed down your search to only the franchises in your price range, you can go through each option to find the right one for you.
How do I start a franchise with no money?
While there are many low-cost franchise opportunities available, it is unlikely you’ll be able to start a franchise with no money down. And, we encourage you to be cautious if you come across franchise opportunities that sound too good to be true - they probably are. Explore all your financing options (see How to Get Money to Buy a Franchise) and you may be able to secure 100% financing with adequate security or collateral.
But, the wisest move may be to delve into the research now while you work on saving the seed money for your business venture. Then, when the time is right, check the listings and move ahead with your franchise purchase then.
What is the most profitable franchise to own?
There's no way to know for certain which franchise opportunity is going to be the most profitable. Even incredibly popular and well-known franchise brands will fail if they are placed in the wrong location or are poorly managed. And, franchise locations that rake in very high revenue may not maintain as high a profit margin as locations with lower sales numbers.
However, a quick Google search at any point can offer general information about which franchises have been the most profitable in recent months or years. (Example: The 10 Most Profitable Franchises in the U.S., published July 30, 2020 by Fundera.)