You’ve heard the word “franchise,” but what exactly is one? A franchise refers to a system of doing business in which a parent company (the franchisor) sells the rights to a system of doing business to individuals (franchisees). Each franchisee pays a franchise fee in order to buy into the system, then pays ongoing royalties for the right to continue using the franchise’s name and trademark. Most franchisors provide franchisees with initial training, as well as ongoing support that typically includes marketing materials, suppliers of inventory, and more.
McDonald's is probably the most famous franchise in America, but franchising isn't limited to the fast-food industry. You can find franchises in just about every industry, from retail stores and restaurants to business and personal services, such as accounting, hair care, and fitness. Whatever type of business you’re thinking of starting, there's probably a franchisor that can help you do it.
But is buying a franchise right for you? Here are some questions to ask yourself in making that decision.
How much experience do you have in your chosen industry?
If you're starting a business where you already have years of experience as an employee, you may not need the additional assistance a franchise provides. On the other hand, if you've always dreamed of starting a restaurant but never even worked in one, the training a franchise provides could make the difference between success and failure.
How much startup capital do you have?
Franchises exist at all price points, from those that cost under $10,000 to those with a franchise fee of multimillions of dollars. Also, keep in mind that you'll pay ongoing royalties throughout your relationship with the franchisor and possibly other fees as well. If buying a franchise in your selected industry will cost more than starting from scratch, you should create financial projections to determine whether the additional benefits the franchisor provides are worth the cost.
How independent do you want to be?
If you’re starting a business because you can't stand following an employer's rules or having someone tell you what to do, franchising probably isn’t right for you. As a franchisee, you’ll be following the franchisor’s systems and rules; often, franchisors will make changes you may not agree with. Franchising works best for people who fall somewhere in the middle—neither “lone wolf rebels” nor corporate drones.
If franchising sounds like an option for you, do some research to select the perfect franchise. Investigate companies you're interested in, either online or by attending a franchise tradeshow. Gather as much information as you can and talk to representatives of the franchisor. Ask if you can get a copy of the company’s Franchise Disclosure Document (FDD). This lengthy legal document describes the franchise opportunity, the company, costs, and fees, what the franchisor provides to you and what you agree to in return. Franchisors must give you this document at least 10 days before you sign any contract with them, but some will give it to you earlier, which gives you more time to dig through the details.
After reviewing all the information you've gathered about franchisors, consider these factors:
- How well established is the franchisor? Brand recognition is a big part of what you're paying for as a franchisee. However, well-known brands come at a cost. Fledgling franchisors, on the other hand, typically have lower startup costs, and getting in on the ground floor has its benefits. You'll need to assess whether the higher cost of a well-known brand is worth it, and whether a new franchise has enough name recognition and experience to help you succeed.
- What do current and former franchisees have to say? The FDD includes a list of current and former franchisees. Call several of each, and ask them more about the franchise. Did the company provide enough training? What is their level of ongoing support? Has the franchisee made the profits they anticipated? Essentially, what is it like to be a franchisee of this company?
Purchasing a franchise is a big investment as well as a long-term commitment. When you become serious about a franchisor, have an accountant review the financial information in the FDD, and enlist an attorney with experience in the franchise industry to review any contracts.