How to Buy a Franchise in 5 Simple Steps

Exterior of a Subway store in Kansas City tupungato | Deposit Photos

Creating a new business and brand identity from scratch is a long and arduous task. It is not for everyone. Therefore, if you want the experience of running an enterprise, but with less risk, then a franchise might be the ideal choice. 

While not quite the same as owning your own business, being a franchisee has some exciting perks. A franchise is usually a tried and tested business operation, with a recognisable product or service. 

When you buy into it, you gain access to an established and often highly loyal customer base. The franchisor management also tends to provide a lot of help and support to get your branch up and running.

Buying a Franchise

If this sounds like an attractive proposition, then you'll need to know how to get involved; after all, it's not merely a case of turning up at your local McDonald's with a wad of cash. To help get you started, we've compiled a comprehensive overview of the steps you'll need to take.

This is how to buy a franchise:

1. Assess Your Eligibility

Franchises exist in a wide range of industries, such as food service, couriering, and real estate. That said, despite such diversity, most franchisors seek specific common attributes and eligibility criteria among potential franchisees. 

Your level of suitability can vary depending on the sector or industry in which the franchise operates. Relevant industry experience is always a big plus – though not mandatory in most cases. However, one thing that virtually all franchisors look for is some experience at managing a business organisation of some kind.

If you possess that experience, then the next thing to look at is your financial situation. Start with your credit score; poor credit is a visible red flag that would dissuade most organisations from accepting your franchise request. 

Minimum thresholds can vary depending on the individual business, but typically, anything above 670 (rated "Good") should be fine. Companies also look at your overall net worth, with global surveys indicating that most franchisees tend to have around $250,000 or higher.

Buying a franchise is certainly not a cheap endeavour, too. The cost of buying can vary wildly from almost $1m (McDonald's) to as low as around $115,000 to $200,000 (Subway). In most cases, this money can not be borrowed from banks or other financial institutions, either.

Therefore, you need to have liquid assets to cover the initial buying cost of a franchise to proceed. You will also need some source of stable income, as it will take you some time to get the business turning a profit. If you can fulfil all of these requirements, then you can start looking for a suitable franchisor.

2. Find a Suitable Franchise

One good thing about the franchise business model is the sheer amount of choice you have, regardless of your location. There are hundreds of franchises with a multinational presence currently operating.

For starters, pick your industry or sector of choice. This is usually based on factors such as your experience, preferences, and local market conditions. Once you zero in on the industry, do some research online and among your contacts to find out the franchisors currently operating in your area. 

It is always advisable to check the brand website to ensure they are accepting new franchisees, too. Depending on market saturation and other factors, franchisors can cease taking new partners from time to time.

If they are, identify how you want to approach the market; for instance, you can start a new outlet in a location where the brand does not have a presence, or you can buy out an already existing outlet.

Finally, while doing your background research, always check for any feedback from existing franchisees of the business. If any frequent negative points crop up, do some follow up studies into them. Contact existing franchisees directly to see how they are doing in the business and gain any insight that you can; you don't want to end up with buyer's remorse later down the line, after all. 

3. Contact the Franchisor

Once you have zeroed in on a suitable choice, contact the franchisor directly and sound them out about the possibilities of buying a franchise (all relevant contact information should be on their website). If they are selling, you will be provided with preliminary application forms. These help the franchisor screen applicants for suitable candidates.

Make a point to fill out these forms accurately and honestly. If you qualify, the company will set up a meeting with a representative who will provide you with further details and a crucial document - the Franchise Disclosure Document (FDD). 

The FDD is often a hefty document with up to 50 or more pages that detail all aspects of the franchise agreement. It spells out everything, from the fees to your responsibilities, rules, clauses, and more. It also contains a history of the franchisor, including legal, financial, and other pertinent details.

You have to read and understand this document thoroughly before proceeding further, so it's wise at this point to enlist the aid of legal and accounting professionals. Once you have completely understood and agreed to all the information in the FDD, it is time to move ahead with the next step.

Before signing a contract, both parties have to get together for further evaluation and consultations. 'Discovery Days' are formal functions where you can meet the management team at the franchisor company and get to know them better. Once both parties are satisfied with their evaluations, the agreement will be signed. 

4. Set Up Your Franchise

Many steps are involved here: you have to select and agree upon a location for your new business, which will require considerable consultation with your franchisor. They will provide you with guidelines and advice on the specific criteria that have to be met, such as rules on not opening a new franchise within a certain distance of an existing one.

If you don't own any property in a suitable location, you will have to choose to buy or lease one. Many new franchise owners favour the latter option as it is more economical, but if funds are not a concern and you are in it for the long haul, then owning the property might make more sense.

Financing is always an option if you are short on funds. As long as you have assets and a decent credit score, franchisors don't mind if you seek access to credit for ancillary expenses. In many cases, they will be able to provide you with leads to their partner lenders. Small business loans, often backed by government guarantees, can be another option.

Franchisors also provide a lot of training and orientation courses to new franchise owners. You should attend these to gain a better understanding of the business. They will also help in the hiring and training process for your initial staff.

5. Open Your Franchise

Once you have completed all the above steps, it is time to unveil your new business venture. The great thing about a franchise is that you are not alone here; the franchisor has an active stake in seeing your new venture succeed. Therefore, they will often help you with marketing and promotional campaigns.

Note that most franchise agreements require you to contribute a fee for regional or national advertising (which is conducted by the franchisor), but at the local level, you have to shoulder the budget for ads and promos. As a result, it is a good idea to allocate a significant chunk of your year one budget to marketing.

After all that, it is time for the grand opening. Franchising is not a 100% risk-free business, no matter what some franchisors claim. You have to put in considerable effort to succeed here. As long as you do your research and prepare well for the road ahead, though, you can be confident of your chances.


What other tips would you give for purchasing or investing in a franchise? Let us know in the comment section below!