Process Of Buying A Franchise
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process of buying a franchise
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There are two parties in a franchise business: franchisor and franchisee. The first is responsible for developing the franchise operating system, and the second is responsible for implementing the system. Which do you want to be?
Franchisees are licensees of the franchisor. Franchisees are good at following direction, or they need to be. A franchisee can own one or multiple outlets of the same franchise, and even own different franchises.
However, you can determine your work environment by the type of franchise you buy. Not every franchise operates at a shopping mall. Many franchises are operated from home, or a small office. Other franchises operate from mobile units: a truck, van or car. What do you prefer?
When you request information from a franchisor, you can expect the franchisor to ask for information from you, such as your name, address, phone number, and the amount of capital you intend to invest in a franchise.
What you can sell, how you can sell it, and other pertinent details about the operation of the business also will be found in the disclosure document. Even information about how to renew your franchise (you will be licensed for a specific period of time, typically 5 to 10 years) and how to sell it will be included in the disclosure document.
Perhaps the most important section of the disclosure document reveals the names and contact information of existing and previous licensees. This gives you an opportunity to contact franchisees, to interview them by phone or in person, and even volunteer to work for one for a few days to see if you like the business.
The advertising fee is also a percentage of gross sales and may be in the range of 1% to 3% paid monthly. This money does not belong to the franchisor. The money is used to underwrite marketing and advertising costs for the franchise network.
First, you need to see a list of franchises to explore available concepts and opportunities. There are more than 1,100 franchise businesses currently registered with the International Franchise Association. Many healthy, growing franchises are listed at FranchisesForSale.com.
To get started, choose two to three industry categories, such as casual dining franchise, automotive franchise, cleaning franchise, healthcare or senior care franchise. Within each category, choose one to three concepts or companies from which to request information.
This document, required by the Federal Trade Commission (FTC), helps you understand the franchise model, fees, and commitments in the Franchise Agreement. (The Franchise Agreement is in Step 7.) The FDD is the legal document that defines the relationship between the Franchisee and the Franchisor.
We are about to get down to business. You will have an in-depth conversation or interview with your Franchisor Representative (from Step 2). Together you will review the FDD and discuss available territory. This is your opportunity to go through the FDD section by section and ask any questions that may have come up in the process of exploring the franchise business opportunity.
Franchisors typically set minimum requirements to ensure that all their franchisees are qualified in terms of personal finances and professional experience. This is because the success and/or failure of their franchisees directly affects their business reputation, brand, and bottom line.
It is also a good idea at this point to draft your timeline carefully for buying a franchise. This will include how much time you can allocate toward initial research, contacting franchisors, reviewing franchise disclosure documents and franchise agreements, obtaining financing, and choosing a location.
You can find a lot of options for franchises based on different industry types, available locations, and initial investment required. A great place to start looking for these options is through various franchise websites that list franchises for sale.
An FDD, also known as the Uniform Franchise Offering Circular (UFOC), is a 50-plus page document that outlines your responsibilities as a franchisee, the fees you need to pay, and the rules and regulations that you need to follow. It also includes information about the franchisor, including its financial and legal history. Getting an FDD will give you all the information you need to know if a potential franchise opportunity is a good fit.
Franchisors are mandated by the Federal Trade Commission (FTC) to provide prospective franchisees with an FDD at least 14 days before any binding agreements are signed and payment made. Franchisees are advised to read and review the FDD carefully. All FDDs follow the same 23-step format. However, the level of disclosure and transparency varies from one franchisor to another.
Typically, banks, lenders, or external investors who will help finance your franchise startup will also want to see the FDD. As the FDD will affect many aspects of your business plan, it is important that you know how to read and understand it thoroughly. Read this guide on how to read a franchise disclosure document to help you understand each section and know what to look out for.
If you need some professional help figuring out the franchise disclosure and other legal documents, check out Rocket Lawyer. It has expert attorneys available to offer you legal advice. Visit Rocket Lawyer to learn more and get your first seven days free.
Meanwhile, a company that has no plans for growth or expansion could mean it lacks a strong vision for the future and intends to remain static. This could also jeopardize your business because a franchisor that does not plan to grow will limit your prospects as a franchisee.
After you review and sign the franchise agreement, the next step is to obtain financing. You will need funds to cover the costs associated with buying a franchise. The first that you need to pay is the franchising fee, which typically is due after you return the signed agreement.
In most cases, lenders will not loan you money to cover the franchising fee. However, your franchising fee can be considered part of your down payment if you apply for a Small Business Administration (SBA) loan or any conventional bank loan. You can find more details on what needs to be paid in the franchise disclosure document.
If the franchise requires a significant investment in equipment, the franchisor will likely recommend a distributor or wholesaler. They might also offer financing, which typically will be structured as a lease and have a term of up to five years.
Make sure to consider your cash flow for the next few years before you agree to short term loans used to finance things like equipment. Ideally, longer-term loans are preferable since recurring payments will be lower, and it can help make your first few years easier. For more information on financing your franchise, you can read our in-depth guide on franchise funding options.
If your franchise is not home-based or mobile, you need to choose a location where you can run your business. Franchisors will likely provide you with guidelines to ensure that you meet their location requirements, which may require a certain distance from other franchises, minimum area, and the number of parking spots. You can seek help from a commercial real estate agent to ensure you find the most suitable place that meets these requirements.
For a start, most franchise owners will lease property since it requires less money upfront and therefore is less risky. However, if you have more funds, you may also want to consider buying your own property, especially if you expect to be in the same location for seven years or more.
If you plan to purchase a property for your franchise location, our complete guide on commercial real estate loans will help you get started with your financing needs. However, as a startup, you might find it more difficult to qualify for a commercial loan from a conventional lender. Luckily, there are nationwide lenders like South End Capital that are willing to finance nonconforming real estate deals.
The next step is to take all the necessary training and workshops to equip you and your staff with the skills and knowledge necessary to run your business. The franchisor typically will provide the training sessions, which will take place in their headquarters, at a franchise location, or virtually and usually last for one to two weeks.
Once you have completed all the necessary training and your location is ready, the next step is to open for business. The franchisor will likely offer assistance in the actual opening of your franchise, which will mostly be centered on promotional and marketing programs to ensure that you build your customer base quickly.
Franchising is a great way to start a business, but before you decide to spend the thousands of dollars needed to buy one, you must do your due diligence. It is essential to understand what a franchise is and how it differs from a chain or independent business. Owning a franchise does not work the same way as a business that comes from an original idea you have.
Our guide will give you everything you need to know about what it takes to be a franchise entrepreneur, also known as a franchisee. We cover franchise examples, how to buy a franchise, financing options, why you should consider hiring a franchise attorney and other key considerations.
A franchise is a business that is owned by one or more people who provide products or services under the branding and rules set forth by a parent corporation. As a part of ownership, the corporation assists its franchisees with marketing and inventory, charging the franchisee fees in return. 041b061a72