How to Buy a Franchise: What is Franchising?

Franchising is a lucrative and flexible pathway to business ownership that allows individuals to kick-start their very own entrepreneurial journeys without going through the exhaustive process of creating a business from the ground up. 

But what, exactly, is franchising? And what essential information should you be armed with before venturing onto this path of business ownership? 

In the most recent episode of the “How to Buy a Franchise” Masterclass, 1851 Franchise publisher Nick Powills breaks down the essentials to help get you started. 

What is Franchising?

Franchising is a business model that allows individuals (franchisees) to operate their own businesses using the established brand, products and services of an existing company (franchisor.) However, this privilege comes with restrictions, notably in the form of an initial franchise fee and an ongoing royalty fee. These fees grant the franchisee the right to operate under the established model, forming the financial backbone of the franchise system. 

While these fees vary from brand to brand, Powills notes that they enable entrepreneurs to avoid the stress that comes with building a business from scratch. 

“If I decided tomorrow that I wanted to go create a pool service company, I’m going to have to build a brand, a website, a marketing plan and an operational model,” he said. “You’re skipping ahead in exchange for paying this royalty and you’re able to continuously operate within that system.” 

During the inquiry process, when an individual expresses interest in becoming a franchisee, they will then receive a Franchise Disclosure Document (FDD). The FDD acts as a comprehensive guide, offering a detailed overview of the franchisor’s business, including its financial health, legal history and key components of the franchise agreement. 

“You’re going to be given this giant document that’s going to give you a lot of insights on how the business is constructed,” said Powills. The FDD is a crucial tool when conducting your due diligence and should be read thoroughly as it is a blueprint of the business you are considering joining. 

Franchise Considerations 

Regardless of the industry and category you’re interested in, a critical first step before entering the world of franchising is to assess your goals and capital. A practical rule of thumb is to aim for a 20% down payment from a cash standpoint and explore financing options from lenders or banks to cover the remaining investment. 

Once you’ve identified a franchise that aligns with your passion, it’s equally crucial to evaluate how much you can actually afford. Ideally, if you want to see a significant return on your investment, you should be financially prepared to afford to open three units within the franchise. Although this is not an absolute, this encourages prospective franchisees to consider scalability from day one. Being financially prepared for three units not only increases your operating capital but also ensures you have enough savings to address any unforeseen challenges that your business may encounter. 

“Remember, you’re buying into a business but you’re not buying into any guarantees,” said Powills. As mentioned, it’s crucial to select a franchise that excites you and has been thoroughly researched. You should always consider the community’s needs and the potential to leverage your community to grow your business. 

Once you’ve addressed the financial aspects and determined your passion, you’ll still need to conduct additional research. While you can utilize the FDD, you should also be exploring other resources and leveraging the power of the internet. The internet serves as a valuable tool to gather information, read reviews and understand the experiences of other franchisees within the chosen brand. 

Franchise Brokers and Consultants

Franchise brokers and consultants can also be helpful tools to use during your research. Many of these professionals bring a wealth of knowledge and experience to the table and serve as valuable guides through the franchising process. However, it’s essential to approach this type of relationship with a clear understanding of its compensation structure. 

While some of these professionals may claim not to be directly paid by you, it’s not as simple as that. 

“If you’re using a franchise broker, a franchise consultant, a franchise coach, and they say ‘we don’t get paid by you,’ technically that is correct,” said Powills. “But these franchise fees that you’re going to pay have gone up for the cost of acquiring you. So in essence, you’re going to pay a higher franchise fee.” 

When considering franchise brokers and consultants, it’s wise to evaluate their track record, reputation and experience with different franchises. Choose professionals who prioritize transparent communication about their compensation structure and are committed to guiding you in making informed decisions throughout your exploration of the franchising landscape. 

Interested in taking the first step in your own franchising journey? Consider learning more at https://1851growthclub.com/.