Business Insights

How to buy a franchise: Is it right for you?

Ready to be your own boss? Owning a franchise could be the way to go.

Many like the idea of owning a business, only to find a startup’s To Do list a little daunting.

One obstacle? Creating a business plan, with details on operations, product mix and income projections. Creating a brand and marketing is another.

Then comes the lengthy process of mastering ins and outs of running a business. In other words, a long learning curve is usually in store for even the savviest entrepreneur.

But a few entrepreneurs enjoy a running start and customers on Day One. That’s why a franchise can make such an attractive choice.

According to Peter Salas, head of Franchise Banking for Regions Bank, owning a franchise can be a good way to own and start a business.

“Franchisees typically outperform independent peers within the same industry,” he said. “That’s because they benefit from having an established playbook and support structure.

“Then add better buying power from group buying and the name recognition of a national or regional brand. This combination can give franchising a big advantage over being an independent.”

Salas said the power of a franchise’s brand is the biggest advantage.

“If a consumer is given a choice between a national brand they recognize and an independent operator they don’t,” he added, “they will usually feel more comfortable choosing the company they know.”

What is a franchise?

In short, a franchise is a business relationship where one party (the franchisor) grants another party (the franchisee) the right to operate under the franchisor’s brand and business system. The franchisee typically pays fees and royalties to the franchisor in exchange for using the brand name, logo and proven operational structure. Once the franchise is established, the franchisor should provide support and marketing needed to help the owner achieve success.

In exchange, the franchisee agrees to pay fees and royalties to the franchisor as well as conform to all the franchisor’s operational requirements.

Is buying a franchise right for you?

Before buying a franchise, take the time to ask yourself some important questions:

Your investment

• Do I have the capital and necessary credit to buy and operate a franchise over the long term?
• Am I confident that a franchise has the ingredients for generating revenue and profits?

Your abilities

• Do I have the skills and mentality to start and run a franchise?
• What skills do I need to further develop, or do I need to find outside sources to help?

Your goals

• How does owning a franchise help me meet my long-term goals for growing wealth?
• How does owning a franchise provide emotional satisfaction and a sense of purpose?

Would you make a good franchisee?

Just like anything in business, there are pros and cons to being a franchise and tradeoffs that need to be understood and managed.

“It boils down to your personality,” Salas offered. “When you buy a franchise, you’re choosing to be part of a concept that’s already proven. The path to success is about following the playbook as presented by the franchise brand. If you’re highly independent, you must decide if you can work within the structure a franchise requires.”

Further, a franchise is a business that requires learning how their operations work.

“As one example,” Salas explained, “A franchise might require you to undergo 100 hours of training, be mentored and even work at their corporate store.”

So, what kind of background makes the ideal franchisee? While successful franchisees come from all walks of life, one profile in particular jumps to the top of the franchisor’s list.

“The franchisor looks at key transferable skillsets such as leadership skills,” Salas said. “That’s why many successful operators have previously worked in corporate America. They know how to follow processes and models, so it’s second nature to implement the playbook and follow the franchisor’s processes.”

At the same time, he added, financial staying power is critical.

“A franchisor looks at your net worth and liquidity — not just what it takes to open your doors. For example, can you sustain your business until it reaches maturity? And will you be able to fund growth or expansion?”

Types of franchises

Almost every public-facing industry, from service to retail to restaurants and everything else, has a concept that’s looking for franchisees.

With so many choices, Salas suggested, “Ask critical questions such as, ‘What am I best suited to do? What work appeals to me over the years to come?’ And, just as importantly, ‘Can I emotionally, physically do this?’”

If researching the right fit for you, Salas offered starting with a franchise expo. “It’s an ideal way to check out a wide array of different brands in one exhibit hall. Walk the floor and talk to as many as you can. If one or two feel right to you, explore a potential relationship.”

What are the yellow flags?

When evaluating franchises to purchase, their track records matter.

Success stories are proof of concept, showing how franchisees are supported with a strong brand, quality products and operations. That usually makes established brands a safer bet.

“Especially with emerging brands, we look at metrics,” offered Salas. “There’s a lot of available data on franchise performance. We look at their transfer rate (i.e., transferring a franchise from one owner to another) and closure rate. And then we compare those statistics to peers, such as one home health care franchisor to another. Some newer franchises might still be figuring it out.”

Another concern? If a franchise is trying to establish itself in a new market. As Salas added, “Maybe your concept works in one state and not in another. Or maybe it’s trying to penetrate what is a saturated market. How will the franchisor help you compete against established players with bigger marketing budgets?”

Steps to buy a franchise

Have you found a franchise operation you like? Make sure they like you as well. That means, as Salas pointed out, a process of due diligence on your part and theirs.

“The franchisor wants to know you have the financial means to start and sustain an operation,” he said. “Once you clear that hurdle, you’ll be provided with a Franchise Disclosure Document, with all the information on the franchise concept. It’s important to scrutinize this to make certain it’s a good fit for you.”

But, even if the numbers look ideal, Salas said it’s still crucial to have the right team pore over the franchise agreement before signing on the dotted line. That means investing in an attorney and accountant experienced in the way franchises work — and what to look out for.

There’s also one other party to bring into the mix: A bank that truly understands the financing needs of franchises. It’s one thing to start an operation. It’s another thing entirely to create a sustainable path.

“The earlier in the process you talk to a banker, the better,” Salas said. “We’re used to working with prospective franchisees, structuring the deal to include opening and investment costs as well as fees.

“Further, customers benefit when we look through a franchise disclosure statement and point out areas of concern. We seek ways to remove risk from your project to assist with maximizing your business success.”

Are SBA loans right for franchisees?

According to Salas, SBA (Small Business Administration) lending is an excellent source of capital in many franchising situations.

“When you look at it, most franchise brands are SBA-eligible,” he said. “And there are plenty of good reasons why franchisees gravitate to SBA lending to leverage capital.”

As one example, the SBA partners with lenders like Regions Bank to help provide capital and loan terms for businesses unable to secure traditional conventional financing options.

At the same time, SBA lending typically provides greater flexibility to borrowers, with loan terms that might extend up to 25 years, versus a maximum of 15 with conventional loans.

“If a franchise is going through expansion,” Salas said, “SBA lending provides options to reduce equity injection towards project costs to help fuel growth.”

Learn more about SBA funding options for small businesses.

If you’re looking to make the leap into small business ownership, but want a defined path for success, a franchise may prove a good choice for you. With the right skills, the right franchisor, and the right financial support, it can offer a path to wealth building and personal fulfillment for many.