Buying a franchise is an excellent opportunity for entrepreneurs to own an established business. Whether you are an aspiring business owner or already have a company, running a franchise can provide valuable experience and take your operations to a new level.
While working with a franchise is less expensive than starting a company from scratch, it still requires significant financing. In this article, you’ll learn how to buy a franchise with a small business loan and explore alternative funding options.
What is a Franchise?
A franchise is a business that involves an established business owner (franchisor) selling the rights to use the company name, trademark, and business model to an independent operator (franchisee). The franchisee pays the franchisor a one-time franchise fee and an ongoing percentage of sales revenue.
The most common types of franchise are:
- Business format franchise — a franchisee operates a business under the franchisor’s brand.
- Distribution franchise — the franchisee distributes the franchisor’s products and services
- Manufacturing franchise — the franchisee produces and sells goods under the franchisor’s trademark.
Franchising is beneficial for both parties. The franchisor doesn’t need to deal with the organizational and financial aspects of opening a new location while the franchisee gets a ready-to-go company with a proven business plan.
The Differences between a Franchise and a Chain
A chain is a group of stores that operate under the same brand, have similar store policies, and sell the same products owned by the same parent company. It may sound very similar to what a franchise is. However, these two concepts are different. The main differences between the two are:
Ownership
When the parent company opens another store in a chain, it retains full ownership rights. Essentially, it creates another store and runs it.
A franchise is owned by a franchisee. A parent company can have several franchises run by different people. Meanwhile, all chain stores are owned by the corporate office.
Expenses
When it comes to chain stores, the parent company bears all the related expenses. With franchises, the expenses are shared by the franchisor and franchisee.
A franchisor can rely on the franchisee to seek financing for its location’s expenses. Meanwhile, funding for each new chain store comes from the parent company.
Profit
Franchisees pay royalties to the franchisor. Meanwhile, all chain profits go to the parent company. As a result, a franchise is a less profitable endeavor than a chain. However, it also requires less effort.
For a parent company, both franchises and chains are methods of expansion. However, with franchises, its involvement is minimal.
Benefits of a Franchise
Buying a franchise business is a serious step for small business owners. However, such a decision comes with a variety of benefits that make such an option highly accessible.
- Higher success rate — with 90% of startups failing, starting a business is a big risk. When you purchase a franchise business, you start working with an established company. This lowers the failure rate significantly.
- Valuable support — when you buy a franchise, you get valuable assistance from the franchisors (equipment, supplies, detailed instructions, etc.). You may also receive training and help with management and marketing from people with experience.
- Cost savings — as a franchise, you can take advantage of a collective buying power to purchase supplies and inventory.
- Established marketing — buying a franchise means you are buying the company’s brand power and benefit from the company’s marketing efforts.
- Easier financing — some lenders are more willing to provide financing to franchisees than to entrepreneurs who plan to start a business from scratch.
- Learning curve — many franchise options are turnkey, which means you get supplies, inventory, equipment, and training. Accordingly, you can spend less time learning how to run a business on your own.
While no business or industry can guarantee success, buying a franchise is a safer way to start a company than doing it from scratch.
How to Buy a Franchise
Once you’ve decided to purchase a franchise business, the next question is: how do you buy a franchise?
It’s important to understand that even though buying and running a franchise may be easier than starting a business, and it still requires a scrupulous approach. Let’s take a look at the key steps to take.
Research the Franchise Opportunity
When you begin looking, you may find a huge variety of opportunities. Start with understanding what type of franchise you want to run. Then look for franchisors that:
- Have proof of being profitable.
- Are in a growing market.
- Provide opportunities for upselling.
- Provide a strong support system for franchises (a turnkey is an excellent option).
- Ask for reasonable franchise fees.
Take the time to talk to existing franchisees and get their feedback.
Finance Your Franchise
Several ways exist to finance your franchise. You need to take the time to explore all the available options to minimize your debt.
Find a Location for Your Franchise
The type of location, the surrounding environment, and the size of the location affect the success of your franchise. Make sure to ask the franchisor if they have any set parameters for the location.
Open Your Franchise
Once you choose a suitable option, find a location, and secure the financing, you can open your franchise. Take full advantage of the training offered by the franchisor. It can save you time and money in the long run.
How to Get Money to Buy a Franchise
Securing financing for a franchise may be easier than for a new business but still requires some significant research on your part. Here are some options to consider:
Franchisor Financing
The prospective franchisor should be the first person you talk to about financing. Many companies that offer franchise models provide financing solutions designed specifically for franchisees.
The main benefit of franchisor financing is that you get all you need in one place. Some franchisors also offer financing options for purchasing equipment and other business needs.
Small Business Administration (SBA) Loans
An SBA loan is one of the most favorable financing options for franchisees. If approved for an SBA, you can enjoy lower interests rates and longer repayment periods. However, the approval process can be long and complicated.
If you are considering an SBA, apply for one as soon as you start researching your franchise options.
Traditional Bank Loan
A traditional bank loan is another great way to get financing for your franchise. You get money in a lump sum upfront to cover your franchise fees. Then you repay the amount in monthly installments.
While the approval is usually fast, the interest rates may be higher than you prefer, especially if your credit history is less than perfect.
Alternative Lenders
Alternative lenders are an excellent choice for franchisees who want to secure financing quickly. They usually have less strict requirements and faster approval times than traditional banks do.
How to Buy a Franchise: The Bottom Line
Buying a franchise is a great alternative to starting your own business. You begin working with an established brand, thus minimizing the risks of failure. Franchisors usually offer a variety of support options for franchisees, thus making the process even easier.
When learning how to buy a franchise, you will come across several financing options. From franchisor financing to alternative lenders, you need to make an in-depth comparison. Don’t hesitate to spend as much time as possible considering your options. The time you spend on research today is a tremendous investment in the future of your company.
