Unlike creating your own business, franchisees pay a royalty and initial fee for the right to operate under a franchisor's established brand and business model. Buying a franchise, therefore, can be an advantageous way to start a business, but you'll typically need a large upfront investment to get off the ground.
Here's what you need to know to buy and open your own franchise.
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What you should know about buying a franchise
Before getting started, you should think carefully to make sure buying a franchise is the best business decision for you. Like any opportunity, there are both pros and cons to franchising. Here are a few things to consider:
Pros
You have an existing corporate framework in which to work.
Your brand and operating procedures are already established.
The franchise has an existing customer base.
The greater marketing plan generally comes directly from the franchise's corporate headquarters.
You'll receive training from corporate headquarters before opening your franchise.
Cons
You'll have to contribute capital upfront. Many franchisors have net worth and/or available capital requirements.
There's a lack of flexibility within the business, which can be stifling for some entrepreneurs.
You'll always have to pay some form of franchise fees to the franchisor.
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How to buy a franchise
If you've decided that opening a franchise is right for you, you can follow these steps to make it happen.
1. Research and choose your franchise
There are a variety of types of franchises to choose from, so you'll want to start researching to find the one that aligns best with your interests, goals and budget.
As you compare your options, you can consider:
Industry and location
You can begin to narrow your search by choosing an industry or sector that excites you and fits with your interests and skills. For instance, consider food, beauty, home services, real estate, hospitality and fitness &#; and then take a look at franchise opportunities within the area that interests you most.
You should also keep your location in mind: Even if you&#;re interested in a certain franchise, not every company will have opportunities in your area.
Upfront costs and ongoing fees
Buying and opening a franchise can be expensive. You'll want to think about your personal budget and net worth and what type of franchise you might be able to afford.
As you might expect, certain franchises are more expensive to start than others &#; and you may need a larger investment if you're opening a location in a popular market, like a large city. Startup franchise costs can range anywhere from $20,000 to $1 million, depending on the brand and real estate requirements.
You can generally find some information on upfront costs on a company&#;s franchise website, but you&#;ll want to contact the company (there&#;s usually a form or an ) expressing interest to get a better sense of the specific costs involved.
You'll also want to find out the cost of the royalty fees. These will be contained in the franchise disclosure document, or FDD.
As you&#;re going through your FDD, be thorough in your research. Ask questions to clarify anything that isn&#;t explicit. And make sure you have a full sense of the costs involved &#; franchises often require investment in areas such as marketing and promotion, signage, inventory and ongoing costs that are substantial, but not always emphasized.
Qualifications
Many franchises will require certain personal qualifications in order to consider you as a franchisee. These can include your personal finances, such as net worth, available capital and credit score, as well as industry and management experience.
You should consult a franchise's website or contact the company directly about any of these requirements. You'll want to make sure you can meet the qualifications &#; and are willing to make the necessary investment &#; before moving forward.
Franchise reviews and personal experience
You can use websites like the Better Business Bureau and Franchise Business Review to read reviews and comments from franchisees to get a sense of their experiences.
For a more personal experience, you can try to attend a "discovery day" with the franchise you're interested in buying.
These discovery days allow you to spend time at the corporate headquarters or in an existing franchise location. They will give you a sense of operations, corporate culture, requirements and what your day-to-day will be like. A discovery day can also be an opportunity for you to make a good first impression with the franchisor.
If you're not sure the franchise is a good fit after the discovery day, listen to your instincts &#; there are many profitable franchise opportunities available &#; and you don't want to invest in a business that isn't right for you.
2. Determine how to finance your franchise
Once you've identified a franchise that you want to move forward with, you'll need to figure out how you're going to finance your business.
You'll need to evaluate all of your startup costs &#; opening expenses, ongoing costs, franchise fees, royalty fees, real estate fees, etc. If you don't have a location yet, you'll want to estimate what you think real estate might cost you.
Because franchises require such a large upfront investment, most franchisees don't have the ability to finance the entire business themselves. Luckily, there are a range of options for franchise financing that can help you access the capital you need to buy and run your business:
Equipment financing. A popular type of financing for those opening franchises is equipment financing. This type of loan enables you to get capital for the purchase of gear you may need to get your store up and running. This could be for something as large as a commercial oven, or as small as a ballet barre.
Business term loans. These &#;traditional&#; business loans enable entrepreneurs to access lump sums of capital to spend as they&#;d like on their business. Generally, business term loans have terms of about three to five years and require monthly repayments.
Business line of credit. A business line of credit provides the ability to access capital incrementally as you need it. That could include large purchases that equal your entire credit line, or smaller expenses such as marketing that only require a little capital outlay. Because these loans are &#;revolving,&#; you&#;ll have access to the full amount of capital again once it&#;s repaid, and you might find that having access to this financing could be helpful for expenses down the line.
SBA loans. Guaranteed by the U.S. Small Business Administration, SBA loans have competitive interest rates and long repayment terms. There are the very popular SBA 7(a) loans, which provide business owners with working capital to make purchases they need. There are also SBA 504/CDC loans, which are meant to finance large fixed assets such as real estate. It&#;s important to note that these loans can be hard to qualify for, and likely won&#;t be available to those who are taking their first stab at running a business. If you have a successful track record, though, you&#;ll want to explore them.
3. Scout a location
A location is a prime part of opening a franchise &#; and succeeding. You&#;ll want to consider whether you&#;re renting a space or buying a building (though most owners rent, at least in the beginning). Of course, you also have the option to run your business from home if you&#;re not client-facing.
Consider these three important factors when selecting a location:
Your surroundings. Is there a &#;retail row&#; in your town? Are there certain businesses that attract a clientele that would be your ideal customer? Consider potential opportunities in these neighborhoods or areas. Of course, you&#;ll want to consider competition, too &#; being too close could work to your disadvantage.
Foot traffic. Is the area you want to open well-known as an area in which franchises like yours can get customers in the door? You can always try to measure foot traffic by taking a manual count of people who go to stores in the area for a few hours.
Accessibility. Is your prospective location near public transit, or is there ample parking? Remember that accessing your franchise is part of the customer experience.
Note that you might want to finalize your location before you seek financing; some franchises may require you to.
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4. Review and sign your franchise agreement
Your formal contract is called the franchise agreement, and it&#;s a document you should review carefully. This is a binding document that lists your fees, obligations and more. If you have any questions, now is the time to ask them.
It&#;s also the time to clear up any discrepancies between any verbal agreements you&#;ve made with headquarters versus what&#;s stated in your contract. If there&#;s a dispute, what&#;s in writing will prevail.
This is also a document that your lawyer should review. (And, if you don&#;t yet have a startup lawyer, now&#;s the time to engage one.)
5. Attend corporate training
It&#;s very likely that you&#;ll have to attend regional or national training to become an expert and get your franchise up and running. Some companies also offer virtual training. These sessions vary in length and sometimes involve your employees.
Understand, too, that you&#;ll likely have to perform ongoing training, including training on new products and technologies, and brushing up on management skills and techniques.
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6. Open your doors
If it feels like you&#;ve done a lot to open a franchise &#; well, you have. Once it&#;s time to open your doors, keep a watchful eye on how things are going, but don&#;t forget to celebrate, too.
Depending on the franchise you&#;re a part of, you may be able to enjoy ongoing mentoring and training from the franchisor, making you a more savvy business owner in the years to come.
This article originally appeared on JustBusiness, a subsidiary of NerdWallet.
Did you know that most home-based businesses cost $2,000 to $5,000, with the average micro business needing at least $3,000 to fund initial operations? That price can be much more if you want to own a franchise, leading most interested entrepreneurs to ask: Is it possible to learn how to buy a franchise with no money?
Buying a franchise with no money is not only possible, but it&#;s also becoming more common. A franchise offers the advantage of an established business model, support from a proven system, and a recognizable brand. The big question, though, is, obviously, how do you become a franchise owner with no money?
In this complete guide, we&#;ll break down the steps to financing your franchise purchase, including creative funding options, expert advice, and franchising tips to ensure you&#;re one of the success stories. You&#;ll also learn about the different types of franchises and how to choose the right one.
Contrary to popular belief, you don&#;t need to be a millionaire to become a franchisor. But let&#;s be clear, buying a franchise with no money (as in $0) is not possible. You&#;ll need to put some skin in the game to qualify for a franchise investment.
Now, if you don&#;t have the capital to fund the upfront cost of a franchise, there are still some options available.
We&#;ll explore these more in-depth below, but some franchisors offer financing options to their potential investors. These can range from in-house financing to third-party lenders with which the franchisor partners. These lenders might require collateral to secure the loan, but it&#;s a way to secure the financing you need.
Additionally, you can enlist the help of friends and family who believe in you and your business acumen. They could loan or even gift you the money you need to invest in the franchise. Remember that this is a huge responsibility; you don&#;t want to jeopardize your relationships over a business deal. Be clear and transparent about your plan and ensure they understand the risks.
There are other methods we&#;ll walk you through, but the main point is that buying a franchise with no money is, unfortunately, impossible. Franchise owners won&#;t sign over the rights to their brand without some investment. However, there are still ways to secure the capital you need.
One of the fundamental principles of business is that there are always costs involved with any investment decision. This holds true for franchises as well. Owning a franchise can be an excellent way to start your entrepreneurial journey. However, the costs of ownership can present some financial challenges.
Here are some of the most common costs associated with owning a franchise to help you figure out how much money you need for franchise ownership. This will help you understand how much money you need to start a franchise and the ongoing costs you&#;ll incur along the way.
The initial franchise fee is the first cost you&#;ll incur when investing in a franchise. This fee covers many expenses, including:
The initial franchise fee can vary significantly from franchise to franchise, ranging from a few thousand dollars to over a million in some cases. There are low-cost franchise options available with lower fees, too. We&#;ll explore a few of those options in just a bit.
In addition to the initial franchise fee, most franchisors require franchise owners to pay ongoing royalty fees. These fees usually range from a few percentage points of your total sales, and the cost will depend on the profit margins and the operational model of your franchise.
Ongoing royalties are one of the primary ways franchisors generate revenue and support ongoing training and support for franchisees.
Another significant cost to keep in mind is the cost of marketing and advertising your franchise. Nearly all franchisors require franchisees to contribute to an advertising fund that the franchisor uses to market the brand and attract new customers. The cost of the advertising fund varies from franchise to franchise, but it usually ranges from 1% to 5% of your gross sales.
Depending on the franchise, you may also be responsible for finding a location, constructing a building, or modifying an existing space to meet the franchisor&#;s design requirements. This high cost often represents the most significant financial hurdle for new franchise owners (especially if you don&#;t have much capital to spend at the start).
Now that you understand the costs of owning a franchise, you might still think, &#;Okay, great. But how do I learn how to buy a franchise with no money?&#; We&#;ve got more than a few options for you!
There are various financing options available that can help you turn your franchise dream into reality. Below, we&#;ll explore six financing options that you can consider to buy a franchise with no money.
One of the most common ways to finance a franchise for people who don&#;t have much money is through franchisor financing. Essentially, franchisors are the companies that own the franchise brand and often provide financial aid to people who want to own a franchise. Franchisors usually offer payment plans or loans that you can use to finance your franchise.
The great thing about franchisor financing is that the terms can be more flexible than a traditional bank loan. However, your franchisor&#;s financial assistance may be limited, with a high-interest rate, or require you to have a certain amount of money for a down payment.
Another financing option is to take out a traditional bank loan. This type of loan can be difficult to obtain if you don&#;t have an impressive credit score or any collateral. However, if you qualify, a traditional bank loan can offer a lower interest rate than other financing methods.
Small Business Administration (SBA) loans are loans provided by the US government for small businesses, and they can be an excellent option if you&#;re looking to buy a franchise with no money. To qualify for an SBA loan, you&#;ll need a strong business plan and a good credit score, but if you meet those requirements, SBA loans can provide generous terms and lower interest rates.
What are your specific SBA loan options? You&#;ve got two main choices.
The SBA 7(a) loan is one of the main types of loans you can use for various business purposes, including buying a franchise. To be eligible for an SBA 7(a) loan, you must have a good credit score and a solid business plan. Repayment terms are usually between 7 to 25 years.
On the other hand, the SBA CDC/504 loan is designed specifically for &#;assets that promote business growth and job creation.&#; This could be real estate and equipment financing or even improving parking lots and facilities.
What&#;s unique about the CDC/504 loan is its partnership between the SBA, a Certified Development Company (CDC), and a lender. The CDC provides up to 40% of the project&#;s total cost, the lender provides 50%, and the borrower contributes a minimum of 10%. Repayment terms are usually for 10, 20, or 25 years.
If you own a home with equity, you can use a home equity loan to finance your franchise. Essentially, a home equity loan is a loan that uses your home&#;s equity as collateral. The interest rates on home equity loans can be lower, but you&#;ll need to meet all the requirements to qualify, which includes having a good credit score and equity in your home.
Are you willing to share ownership of your franchise? If so, partnerships can be a viable financing option. Essentially, a partner will invest money to help buy the franchise in exchange for a percentage of the profits. Finding a partner can be challenging, but if you do, it can help alleviate some of the financial strain when buying a franchise.
While you can partner with friends or family members, we urge caution when doing this. Working with family members or close friends might seem like a great idea, but it can often cause rifts in relationships. It&#;s also wise to have a contract regarding ownership and shared profits (among other things) to protect your interests.
Finally, Rollovers for Business Startups (known as ROBS), allow you to use retirement funds to start your franchise without incurring any penalties or taxes. Essentially, you&#;re investing in your business with your retirement savings. While this type of financing involves some risks, it can be an excellent option if you don&#;t have any other financing options.
So, you&#;re ready to buy a franchise but don&#;t have the money to do it. Even if you access funding via one of the franchisor funding methods mentioned above, you might still find yourself strapped for cash. Here are some tips for finding the right franchise opportunities when you have little (or no) money.
Many franchises offer lower starting investments than others, especially those with a home-based or online business model. These franchises can lessen your financial risk until you start to make money.
If you&#;re knowledgeable about franchises and can sell an investor on the concept, landing an investor with deep pockets can give you the capital you need. However, be wise about who you choose to partner with. Some investors want full control over business operations, which can get messy.
As mentioned, some franchises offer financing options for those who can&#;t afford to pay cash upfront. Discuss all financing options with the franchisor before signing any agreements. Ask about any potential discounts or deals you can agree on to ensure you get good terms.
Networking with other entrepreneurs in your area can lead you to discover new franchise opportunities with more budget-friendly startup costs. It&#;s also just a great way to feel supported on your business journey.
The hard work begins once you&#;ve found the perfect franchise for your budgetary needs. While building capital, these tips can help run a successful franchise business. This will be key if you&#;ve borrowed money and must ensure your business is profitable to earn cash to repay your loans.
Marketing is key to getting customers through the door. If you don&#;t have the budget for a professional marketing agency, focus on affordable do-it-yourself marketing tools like social media marketing, marketing, and networking.
Managing your inventory will ensure that you can minimize costs and maximize profits. Keep track of popular products which aren&#;t selling well to ensure your franchise runs smoothly.
By asking for a personal referral, offering in-store incentives, and creating a regular newsletter, you can cultivate a loyal customer base that keeps returning for more.
Learning how to buy a franchise with no money is possible, but it takes research and perseverance. The most crucial aspect is finding the right franchise that fits your skills, interests, and financial limitations. Ready to find a franchise that fits those factors?
Our search filters make it easy for you to browse through different franchise opportunities and find the one that suits you best. Whether it&#;s a food business, a retail store, or a service-based franchise, we have options that fit different budgets and industries.
Don&#;t let financial constraints hold you back from achieving your entrepreneurial dreams. Start browsing today and take the first step towards owning your own business.
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