The idea of owning a company is appealing to many, but the daunting nature of entrepreneurship keeps many people from starting a business. The U.S. Bureau of Labor Statistics reports that just over 20% of startups fail within their first year, which is a discouraging statistic. However, there are other, arguably safer, ways to live out your entrepreneurial dream.
Opening a franchise is an excellent option for achieving business ownership without facing all the hurdles a new startup can bring. Read on to find out more about how to start a franchise, the pros and cons of investing in a franchise and details on choosing a franchise industry that's right for you.
What is a franchise and why should you invest in one?
A franchise is a type of business in which a person (the franchisee) pays franchise licensing fees to the trademarked brand (the franchisor: the base company that created the products and/or services) to open and operate a business under that brand. Franchise examples include almost anything, from fast food restaurants and car dealerships to hotels and gas stations.
What might cause potential business owners to choose franchising over starting up a business from scratch? To begin with, the franchisor has already done all the work of developing products, services and operating procedures, and building the business brand. So, franchises offer you resources and security that you wouldn’t otherwise have if you were to open a non-franchise business.
What are the pros of franchising?
- Instant brand awareness: If your franchise brand already has nationwide locations, credibility and reputation are likely already established.
- Standardized business operations and training: From human resources to marketing, it can be challenging to decide how every aspect of your business will operate. Franchises come with a standardized plan for how the franchised site should run. Think of this as a blueprint for your new business with access to training tools and documents for your employees.
- Support and resources from a big company: An unnerving aspect of starting a business is feeling like you have to do everything on your own. But starting a franchised business means you’ll have access to a pool of resources provided by the corporate entity. In some cases, your franchised business may receive some equipment from the franchisor. Additionally, the franchisor will have already performed research and devised a plan of action when new products and features are ready to roll out. Then, all you have to do is sell them according to the company plan.
- A network of franchisees to contact for help and advice: The ability to network and learn from fellow franchisees is invaluable as you navigate challenges and market changes.
- Fast return on investment (ROI): Franchise owners can typically open their doors and establish a customer base quicker than startup businesses.
- Simplified legal procedures: Your franchisor will know how to handle legal situations, and they will help you work with your local governments and regulations when needed.
What are the cons of franchising?
- Less freedom than new ventures: Since franchises have parent companies, you aren’t free to make certain decisions yourself. Franchises come with more support but less autonomy.
- High opening costs: Since you’re buying into an already established brand, the initial costs for opening a franchise may be higher than you think. Some prospective franchisees apply for a business loan to pay the licensing fees.
- Paying Royalties: Depending on the contract, franchisees can expect to pay a royalty fee to the franchisor for the entire life of the franchise site.
- Unexpected expenses: You’ll have to spend additional money on rebrands or new technology whenever your franchisor requires it.
- Sourcing products from approved vendors: The franchisor may provide you with a list of approved vendors for products. While your contract may allow you to choose your preferred vendor, you likely can’t choose one that the franchisor doesn’t have on its approved list. Consistency is key to maintaining product standards and, in turn, loyal customers, and benefits both the franchisor and the franchisee.
- National press: Customer reviews and opinions are powerful, and nationwide recognition can be great for business growth. But if the national brand receives negative press, your local branch may feel part of the aftermath.
How do you start a franchise?
Opening a franchise is similar to the beginning steps you’d take to start any business. First, you’ll conduct market research to decide what industry best suits you and to understand the market you’re entering. Then, once you’ve narrowed down the industry choices, you’ll research some existing franchises to understand your options.
Research and choose your industry
Just as if you were initiating a startup, you want to be passionate about the market you’re entering. Decide what industry piques your interest and research opportunities in the category that you’re most attracted to.
Here are a few popular franchise categories you may want to consider:
Retail is a broad term, as it’s simply defined by the sale of goods and services to customers. Clothing, gas stations and convenience stores are just a few examples that fall under the retail umbrella.
There are plenty of opportunities to start a franchise in the food industry. There were about 790,000 franchised businesses in 2022. That number is expected to rise to 805,000 in 2023.
Physical fitness and wellness centers
There’s no shortage of gyms and fitness centers for adults. Nutrition franchises are also an opportunity for those who are interested in businesses that focus on health. Professional massage franchises are also becoming more popular. But you may want to get into a more specific niche, such as kids’ gyms and swim schools or specialty sports such as martial arts.
Vehicle repair shops
In 2020, IHS Markit, now part of S&P Global, reported that the average age of automobiles in America is just about 12 years old, so car owners likely need maintenance and repairs now more than ever. The roughly 9,000 auto maintenance and repair franchises in the U.S. were worth about $9.7 billion in 2022.
Home service providers are in high demand with the ongoing trend for homeowners to remodel and repair their homes following the COVID-19 pandemic and higher home prices. Home service franchises can be anything from plumbing services to solar installation.
Pinpoint how much you want to spend and what costs to expect
The amount of money it takes to open a franchise varies. Each of the franchise industries listed above comes with different equipment, inventory and service needs, so initial investments and associated costs are all over the map. To narrow your pool of choices, decide what you are willing to spend when opening a franchise and account for additional costs. The majority of franchised businesses can average costs between $50,000 to $200,000 to get started, although costs can be as low as $10,000 or as high as a few million, depending on the franchise.
Initial franchise fees aren’t the only costs to consider. You’ll likely want to hire an attorney to review contracts, an accountant to crunch numbers and a franchise consultant to advise if you're new to all this. In addition, you’ll need to purchase or rent a location if you’re opening a brick-and-mortar location. Inventory, equipment, insurance, business licenses, landscaping and signage are all other costs to keep in mind. Here’s a tip: you can save a little bit of money by getting a free business phone number.
Consider applying for a small business loan if you need financial help to open a franchise. To manage your business’s money, check out these lists of the best business checking accounts and the best accounting software for small businesses.
While working out your budget, you want to be realistic about your franchise’s earning potential. Once you know the initial fees and startup costs, research sales figures for the franchise brand you’re considering, specifically in your geographic area, to determine if the franchise will provide a positive ROI.
Get your business plan and goals straightened out
As with any venture, going in with a strategic plan and a clear set of goals is important. A traditional business plan consists of the following:
- An executive summary
- A company description
- A market analysis
- An organization and management structure
- Your service or product line
- Marketing and sales plans
You’ll likely need to present your business plan, personal financial stability and goals to your franchisor for application approval or denial. Just because you want to open a franchised business doesn’t mean you’re in the best position to do so. Ultimately, it’s the franchisor’s decision whether or not to sign a franchise agreement with you.
Create your LLC and sign your franchise agreement
It’s a common misconception that opening a franchise means you automatically have personal asset protection and a business structure. Just because the franchisor has a limited liability corporation (LLC) doesn’t mean that each franchisee will get the same business protection and tax advantages.
LLCs are a common business structure for franchises. An LLC will ensure that you have personal assets and limited liability protection. You’ll want to set up your own LLC before signing your franchise agreement and conducting any business.
The franchise agreement is a contract between you and the trademarked brand company, signed after the company has approved your application to open a franchised site. The contract defines the terms and conditions within which your business is to function — whether that means selling the brand’s goods, providing the brand’s services or both. Additionally, the contract will stipulate the licensing fees and royalties you’ll pay.
The purpose of the franchise agreement is protection for franchisors and franchisees. The contract ensures the security of the brand’s property, which is usually trademarked or patented. It also defines the level of support the franchisor owes you as a franchisee. You can’t do whatever you want with the brand’s products or services without the franchisor’s approval. You must follow the brand's business model. But in return, a franchisor commits to a certain level of support, including training and advertising support.
Both the Federal Trade Commission and your state have laws that oversee franchise operations.
Find a physical location and start hiring
Location is a key driver of business success. Note the visibility, accessibility and surrounding competition when choosing a franchise location. Consider what your customers like. Are there nearby businesses that are succeeding in your category? It may seem counter-intuitive, but sometimes it makes sense to locate where you have some competition. Fast food restaurants that operate side-by-side with others often do quite well, for example. Depending on the nature of your franchise, you may want it to be close to major highways and roads, as in the case of a gas station. Additionally, think about the amount of land you’ll need for your lot and how much parking you’ll need to offer your customers.
Any franchise needs a stellar team that offers superb customer service. But, there are a few important elements to remember when hiring top-quality employees. First, decide what kind of employees will make your business successful. Someone outgoing and friendly? Someone who relishes challenges? Someone who loves working in a team-driven environment? Seek out individuals who align with the success factors you’ve defined. Giving each potential employee a personality test is an effective method to accomplish this.
Successfully start your own franchise
Owning a franchised business is an excellent option for those looking to run a business and still benefit from the support of a parent company. Possibilities in the franchise category are growing. Following franchise trends can aid you in picking the best franchise.
Deciding whether you want to open a franchise is not a simple matter. When you’re sure that’s what you want to do, review this simplified breakdown on how to get into franchising:
- Perform market research and choose your industry
- Nail down your startup investment and associated costs
- Decide how you will fund your new franchise
- Create a detailed business plan
- File for an LLC before signing a franchise agreement
- Find a physical location
- Hire employees
Remember that a successful franchise site is not entirely dependent on the support of the franchisor. Savvy, ambitious and ethical franchise owners are most likely to prosper in the franchise industry.