Becoming a franchise owner can be a great way to fulfill your dreams of entrepreneurship. Perhaps you have the savvy to run your own business, but are not interested in starting an original venture or putting together a brand from scratch. Buying into a successful franchise operation can give you the rewards of business ownership without as many of the headaches.
When you buy a franchise, you’re not exactly buying a business. Rather, you buy the rights to utilize a business logo, name, and products. In many cases, you maintain an ongoing relationship with the main company, which supports you with things like marketing materials, training programs, and supply. Popular franchises include fast food outposts such as Subway and McDonald’s or hotels like Motel 6. Other franchises include car rental chains, hardware stores, and gyms.
Of course, to own a franchise and cash in on the benefits that come with it, you have to invest up front. And the cost isn’t exactly pocket change. Depending on the industry, opening a franchise can cost as little as $10,000 or up to several million dollars.
But most franchises require $50,000 to $200,000 to launch. Chances are you will need outside financing to launch your franchise. Here are the steps to look at if you’re thinking about getting into the franchise world:
1. Compare Cost Versus Value of Opening a Franchise
Compare the costs of opening the franchise to the expected benefits. On the cost side, include franchise fees, royalties, marketing expenses, and what you’ll pay for products. On the plus side, estimate your projected revenue, along with benefits like training, site selection, and recipes. Then decide whether moving forward seems worth it.
2. Vet the Franchisor
A Franchise Disclosure document will tell you about black marks in the company’s history, including bankruptcies and litigation. It will also help you figure out whether the company’s franchises are expanding or closing, and how the parent company is doing financially. If franchises have a high failure rate, take note. It can help to have a lawyer take a look as well and to talk to other franchisees to get their perspective.
3. Scope Out the Market
Make sure your area isn’t already overloaded with other franchises from the same company. Also, look at competitors outside of the brand who have similar businesses, and gauge their success or failure rate.
4. Figure Out How Much of Your Own Money To Invest
You don’t want to risk too much of your own funds to open a franchise. Experts suggest investing no more than 15% of your net worth. The rest can be financed by partners, the parent corporation, or loans from other institutions.
5. Apply For A Traditional Or Small Business Administration Loan
Given the cost of opening a franchise, it makes sense that many new owners need help with financing. Nearly 40% of franchise owners use a loan from a commercial bank to get started, according to the U.S. Small Business Administration.
One option is to apply for a traditional loan from a bank or credit union. Keep in mind that these financial institutions often require you to have significant collateral and a strong credit history, and they charge high-interest rates.
You may also have trouble borrowing from traditional lenders if the franchise you’re opening doesn’t have a history of brand awareness or impressive financial performance. If you’d prefer not to put up collateral (like your house), finding an alternative to traditional loans might be a better fit.
Small Business Administration loans are another option available to all business owners, including franchisees. Because the agency guarantees these loans, you may get better terms or lower interest rates from your lender. The SBA offers financing for franchises that are part of its Franchise Directory .
6. Apply For Franchise-specific Financing
If a traditional or SBA loan isn’t right for you, franchisees have some financing options that are not available to other business owners. Some franchisors offer funding themselves or partner with lenders to offer loans. There are also companies, such as BoeFly and Fundation, that specialize in funding franchises.
So there you have it, a few tips for getting started with franchise financing. Good luck!
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