“I am in love with a McDonald’s girl. She has a smile of innocence. So tender and warm. I am in love with a McDonald’s girl. She is an angel in a polyester uniform” (Mcdonald’s Girl, Inside Out, 1999).
That McDonald’s girl must be about 36 or 37 years old by now. She probably owns her own McDonald’s by now or has a chain of them. Or with the experience she got from there, she maybe has her hotels or fast-food restaurants.
Assuming that the young McDonald’s girl has her own McDonald’s by now, various questions are essential on how she came to own one; and the most important is how that is possible. The answer is franchising. Simply put, franchising is paying someone or an entity an amount of money to use its business name, business strategy, operations strategy, and marketing strategy.
How franchising works
The entity or person paid an amount for the use of his/her name is called a franchisor; the one who pays the said amount of money is called a franchisee. You can learn more about how franchising works.
Franchising is paying someone an upfront fee and regular sums of money afterward to use the right business name and quality that they have maintained, provided you maintain those standards. To be eligible as a franchisee, there are specific criteria that you will have to meet. The franchisor has to consider things such as your capital (both borrowed and own), your experience and motivation, etc., for them to know whether you can be trusted to use their name.
To give an example of McDonald’s, the total costs to open a restaurant as a franchisee range from $700,000 to $1.5 million. To even get to this stage, you will have to show that you have $250,000 of your own money that is not borrowed.
In this article, I will take you through all that you need to know and be prepared for if you are thinking of buying a franchise.
How to choose a Franchise
Franchises vary, from the industry they operate into the services they offer, how big they are, etc. It is essential, therefore, to know some things about yourself when choosing which franchise to buy. And different franchises have different criteria for selecting franchisees, but the following are the most common:
- Credit Score. Franchisors limit the minimum credit score they look for before choosing a franchisee, but a score of 680 and higher is the ideal limit.
- Cash on hand. You will need to have enough capital on hand to cover down-payment or initial franchise costs.
- Secondary sources of income. It is essential to have other sources of payment as you get the franchise running and profitable.
- Net worth. Franchises can vary in size. For example, the large franchises may require franchisees to have a higher net worth for them to qualify.
- Management experience. As you will be managing people and starting a new business, the franchisor will feel safer if you have some management experience like the one running it.
Franchise types
There are various occupation industries, some offering services, and others offering products. It is, therefore, vital to know the types of franchises and their examples.
- Job-Franchise
These types of franchises require minimum capital investment and can even be run from the comfort of one’s own home. This can be done alone. The examples here include pool maintenance, plumbing, local travel agency, real estate services, children services, etc.
- Product franchise
This is one of the most common types of franchising. Here, the franchisee distributes the franchisor’s products. It can also be called Distribution franchising. Examples here include products such as cars, computers, and home appliances such as fridges. Etc. An example here is local distributors selling Pepsi soft drinks.
- Business Format Franchise
This is the most popular type of franchising. The franchisee uses the franchisor’s trademark in the business format franchise and gets the business and marketing strategy. The most popular variety of industries to use this type of franchising are fast foods, restaurants, and fitness centers.
- Investment Franchise
These are usually large projects that require a lot more capital investments, e.g., Hotels such as Four Seasons Hotels & Resorts. For example, in these cases, the franchisee can choose to hire/employ managers with more knowledge and experience to run the business.
- Conversion Franchise
This type of franchising happens when a business takes over other businesses in the same work line and converts them into franchise units. This offers massive potential for growth and expansion. Examples here include florists, home services such as plumbing, real estate brokers, etc.
Franchise opportunities
You now know the types and examples of franchises, and you have a better understanding of what you would like to get into and whether it will work for you. The next step is identifying Franchise opportunities. To do this, you must research and find a franchise that meets your needs and capabilities, both in terms of finance and skill.
There are various websites online that list franchises on sale; this is an excellent place to start. It is also essential to know the user and customer feedback about the franchise you are interested in. You can use these two links to do that: Better Business Bureau and Unhappy Franchisee.
After you are satisfied with the reviews of the franchise or franchises you are interested in, you need to make a few considerations and make a conclusion based on the following:
Considerations to make when buying a franchise
Costs
Legal and Accounting Fees
You must use a franchise attorney to help advise on the legal procedures involved in buying a franchise. The attorney will assist in reviewing documents such as FDD (Franchise Disclosure agreement) and the franchise agreement. The more time you spend with an attorney, the more it would cost, but it is advisable to set aside between $1,500 and $5,000.
Working Capital
This is the amount of cash that will cover the day to day running of a business until it is self-sustaining. It can cover a duration anywhere between 2 months to 2 years, but it is essential to estimate based on thoroughly done research.
Franchise Fee
In most cases, this covers just the franchisor’s right to use a franchise name, and they may cover anywhere from $20,000 to $ 50,000. Most also cover training costs. But they vary from company to company, so it is vital to be on the lookout for this.
Build-Out Costs
These are the costs involved in setting up the franchise in a location that has been approved by the franchisor. They include charges of items such as furniture and equipment to costs that include services such as interior design, insurance, and architectural designs.
Supplies
This is the cost of items needed to start operations on your franchise, e.g., office supplies, etc. The list of these items should come from the franchisor.
Inventory
This is especially important for a franchise that sells specific products. And you may be required to have between $20,000 to $150,000 worth of inventory to start operating.
Travel and Living Expenses While Training
This is important to consider as training may be provided for up to 3 support staff and can last from a day to a week. In most cases, the franchise fee covers the training cost, but the franchisee will cover accommodation and travel expenses.
Legal Requirements
These vary from industry to industry due to individual specific requirements or conditions. There are various standard legal documents found in a modern franchise agreement:
- Application form;
- Deposit and confidentiality agreement;
- Franchise Agreement;
- Lease, Sublease, and Conditional assignment of the lease;
- Individual shareholder non-competition and confidentiality agreements;
- General security agreement;
To learn more about the legal requirements required when buying a franchise, visit purchasing a franchise.
Overview of steps to follow when buying a franchise
After you have done your research and are comfortable that you meet the criteria to buy your desired franchise, follow the below steps to acquire it
Contact Franchisors for Initial Applications and FDDs
Here, you will fill the franchisor’s application forms, which are used to determine the suitable franchisees’. If you are successful here, you will be given the franchise disclosure document.
1. Franchise Disclosure Document (FDD)
This document contains the roles and responsibilities of a franchisee and information about the franchisor, including financial history. This document should be given to the franchisee at least 14 days before signing any binding agreements.
FDD’s can vary depending on the franchise, but below are the common types of information in them:
- The franchise system’s size and 3-year growth trends
- The franchise’s brand presence in the prospective franchisee’s location.
- The franchisor’s management and leadership team and their level of experience.
- Financial obligations of the franchisee to the franchisor.
- Support offered to the franchises (e.g., training, advertising, financing and)
- The financial performance of the franchisor.
2. Attend the Franchisor’s Discovery Day
This is a day organized by the franchisor for franchisee’s to ask questions about the franchise. Here, you can get information on how to run the franchise successfully.
3. Carefully analyze the Franchise Agreement.
This is to make sure that you are okay with the franchisor’s conditions, and you are sure you will meet them.
4. Get adequate financing for your franchise Startup.
This will make sure that you are covered during startup until such a time that the franchise is self-sustaining.
5. Choose an ideal location to set up your franchise.
You and the franchisor both have to agree on that location.
6. Take the necessary training and workshops offered by the franchisor.
7. Adequately prepare for your grand opening.
Advantages and Disadvantages of buying a franchise
Advantages
- The system that the franchise works on is already tried and tested, and so it will be easy to set up and start operations, unlike having to start from scratch.
- The franchisor offers a lot of training and operational support, and so not a lot of experience is needed to start.
- You will get support from other franchisees in the franchisor’s network.
- You will benefit from the connections that the franchisor has made over time. As such, you may get supplies at a lower cost.
- It will be easier to secure financial help using the franchise’s name, but these loans are for the business’s operations.
- You will benefit from the collective advertising that takes place. The franchisor usually does this, and it generally, in most cases, helps all the franchisees.
Disadvantages
- Less control than when running your own business. In most cases, franchisors have a way they would like a business in franchises conducted, and this can even be in areas such as where franchisees buy their supplies.
- They are sharing profits with the franchisor. These are called royalties, whereby franchisees pay a certain given percentage of their profits with the franchisor, usually regularly for the use of trademarks and processes.
- There may be rates set for individual expenditure costs, such as spending on advertising, thereby limiting creative freedom.
- The reputation of a franchise is also tied to other franchisees in the same network. And this can be disadvantageous if one franchise in the system gets a bad reputation as this could also affect your sales and business.
- Renewal power rests with the franchisor. And if the franchisor feels that you are not meeting set terms and conditions, he holds the power to refuse renewal of your agreement to use their trademarks and patented processes.
More information on the guidelines of buying a franchise is provided in the guide to buying a franchise.
FAQ
How to buy a franchise?
Identify the franchise you would like to buy, make sure you meet all the franchisor’s requirements. Meet with the franchisor and sign the agreement after all the standard fees are paid, and you can start operations.
How much does it cost to buy a franchise?
Franchise costs vary, but most are between $20,000 and $50,000. However, there are other additional costs involved before one can begin operating.
What are the advantages and disadvantages of opening your own business instead of buying a franchise?
The main advantage, and it is also the most critical, is the control you will have when running your own business, and this includes areas such as you can set your expenditure costs you can come up with your processes.
The main disadvantage is that you will be starting from scratch, and this will be more time consuming and intensive, and you will have little support compared to when you buy a franchise.
Are franchises a good investment?
Yes, they are. Since there is already a thriving culture in the franchise, it is already known and hopefully popular.