Knowing if buying a franchise is a good idea comes down to the amount of risk you’re willing and able to take on both financially and socially right now. If right now is not a good time for you to buy a franchise, then this could be the time to prepare yourself. That way, you put yourself in a situation where you’re not going to lose money, you don’t have to sacrifice family or social time, and you’re able to manage the stress levels that come with entrepreneurship.
There are built-in benefits that make franchises an appealing opportunity, compared to a standalone business. Benefits include:
- You get brand name recognition from day 1.
- The franchisor will train you and your team on a proven set of business operations.
- The franchisor will partner with you on marketing to help drive in customers.
- Many franchisors offer financing assistance.
- The other franchisees give you a built-in network of advisors with firsthand experience.
If you start your own business as a standalone brand, you can still succeed, but you don’t have a proven roadmap. The tested path to success is why franchises are good for people that haven’t had startup experience or time running a business for someone else. There are also franchise loans you can take from a bank, or you can tap into the corporate lending programs to help you get off the ground.
Interesting fact: A franchise can boost your chances of success by about 70% vs an independent small business, as this study by Frannet found.
It’s not the right choice for everyone that wants to start a business since you don’t get the same freedom to create and innovate as you would with your own independent business. But if you like rolling up your sleeves to dive into details while also thinking about the big picture, you love to execute a good idea that is proven to work, and your personal financial situation and lifestyle are a fit, then buying a franchise could be a good idea for you.
If you’ve always dreamed of being your own boss, here’s a guide to help you know if buying a franchise is a good decision.
Personal Goals and Style
The first step is to make sure your personal goals, lifestyle desires, and your work style match what you’ll need to be a successful franchisee. Here’s what separates a good decision from a bad one:
Good Decision | Not a Good Decision |
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Managing a franchise requires a lot of hands-on time and requires you to think at a high level while also managing minor details. You’ll make real estate decisions, run marketing and advertising campaigns, be responsible for employee hiring and firing, spend time with customers, negotiate with suppliers, and more.
As you grow, you get to develop talent like general managers for the multiple locations you open and watch them thrive under your guidance. If you grow big enough, you can sell your business and retire or hire a CEO to run the organization while you collect the residual income from the fruit of your labor.
But if your #1 personal goal is getting rich, retiring early, or investing a bit of money and time into a business that gives you passive income, franchising probably isn’t a good choice for you. You can make a lot of money, but there’s no guarantee you’ll get rich, as the average franchisee makes a six-figure income.
Think about your lifestyle goals as you’ll spend more hours at your business location than time at home, compared to a normal job. If you’re okay spending time away from family and friends and missing social events, buying a franchise could be a good decision. On the plus side, the work is fulfilling, as you’re building your own business and every hour spent helps set you up for success.
If you’re married and your significant other also has the entrepreneurial spirit, franchises can be a good way to build your nest egg for retirement. This is especially true if you have complementary skills, like one of you is great with customers and the other is a finance whiz. If you decide children are going to be part of your life, you can build a business they can inherit when you retire.
Next, make sure you like to follow a recipe vs make things up as you go, since franchises require you to follow standard procedures. Buying a franchise won’t be a good decision for you if you’re the creative type that likes to come up with ideas, go out and test if they work, and then tinker until you create something better.
Many franchises have strict guidelines where you can’t do anything other than what’s set in stone by HQ. If you want creative freedom, check the contracts and details before signing on the dotted line. There will always be some form of central control and brand guidelines, but some franchises have a bit more freedom with menu items, advertising opportunities, and local branding, for example.
Researching the Market and Franchise Company
The next step is to research the market to make sure there’s demand and the right demographics for the franchise you are interested in. If the type of franchise you want to buy doesn’t match the demographics of the area you want to build it in, you may fail. Or you may be able to match the demographics with a franchise, but it isn’t an industry or niche you truly love, and that can make the dream of entrepreneurship turn into a nightmare after a few years.
Research Market Demand and Franchise Fit
Local market research is critical because your franchise depends on the people around it to buy things and being able to hire employees in the area. You also will depend on local business partners in many cases and compete with other businesses in your same category.
For instance, if you open a family-friendly restaurant in a city where people are regularly moving to the suburbs and being replaced by young singles or dual-income-no-kids (DINKs), you will have a tough time staying in business for the long run.
While you may then want to open your franchise in the suburbs instead, make sure there is enough demand, considering the competition that may already be there. Each suburb has unique demographics including age, marital status, kids or no kids, and even the ages of the kids.
Some regions are known for having more high schools vs. elementary schools, and others for their bustling entertainment venues and dog parks. Even though the median incomes are equal, the demand for types of food and services will change drastically.
Here’s a formula you can use as a starting point to estimate your potential revenue using a family restaurant as an example (details about the inputs to the formula are in the table):
- Find Potential Market Demand = Total families in your target × average times they eat out per month × average check
- Estimate your Potential Monthly Revenue = Potential Market Demand × Estimated Market Share
Data Point | Key things to identify for data | Example places to find data |
Total families in your demo target group |
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Census Bureau
City economic reports and data |
Average times they eat out per month |
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Average check amount |
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Estimated market share |
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Check how the data changes over time. A low percentage of families with kids 6 to 17 might not be great. But if it is increasing over the years, it could be that young kids are growing up or established families are moving in more often. That could make buying a franchise in such an area a good decision for you.
You’ll be first to market and become “the good one” as you win customers. Although business may start out slow, as the families mature and meet your demographics, your franchise business may grow. If your situation allows for financial flexibility in the first few years, that is a sign this is a good franchise opportunity for you.
The second part of the research step is making sure the operations side is equally as abundant as the customer side.
- Fast food franchises rely on entry-level employees, usually with high turnover. So, check that you have the right demographics to staff your franchise and won’t run into an issue like the local high school closing and all the kids going to the next town over, which could make it hard to find help.
- Dental franchises require licensed doctors and technicians. Make sure there are enough that both live close enough they’d work for you and also want to work for a franchisee instead of opening their own practice. You could find data from your state’s board of dentistry like this one from Montana, and you could talk to dental schools as a recruiting source.
- A plumbing franchise might not have a physical office, so you’ll need to advertise for customers. You can buy geo-targeted online ads, but these make it hard to get lots of leads in a short amount of time, especially in smaller cities and towns. Make sure you can reach the local population in other ways, like through local newspapers and billboards.
- Regardless of what you want to do, local regulators can be a help or hindrance. Find out who in local government has a say on inspections, approvals, and certifications and if there is anything to watch out for. Talking to established business people in the area and checking local forums can give you insights you won’t find in research reports.
Picking the Right Franchisor
Once you have a good feel for market fit, it’s time to pick the right franchisor since many types of franchises have multiple options. There could be 10 or more franchisors for hospitality and travel, but you will have fewer options for a disaster clean-up service.
A great place to start is checking the franchisor’s Better Business Bureau ratings and looking for any litigation involving the franchisor, which might indicate a problem.
Next, talk to other franchisees. Most franchisors will help arrange interviews with existing franchisees in what they call “franchise validation.” They’ll give you the good, the bad, and the ugly from personal experience and can offer insights on day-to-day operations, financial performance, and the level of support they receive from the franchisor.
Ask them questions like:
- Did you hit the financial goals you expected (on time, faster, or later)?
- What were the biggest operational or staffing challenges you faced?
- Did the training and support meet your expectations?
- Would you invest again if you had to start over?
Pro-tip: Get extra insights from franchisees by going to trade shows like the Great American Franchise Expo, attending industry association conferences like those from the IFA, and finding franchisee groups on social media, like this one for franchisees for a big gym on LinkedIn.
Make sure to speak with as many as you can because just 1 or 2 isn’t enough to get a full and fair story. If you talk to 10 owners from different regions and they all say the same thing, you can be confident about the answers and decide whether buying a franchise is a good idea for you.
You can also hire a franchise consultant to help with the process, much like a financial advisor helps advise you on complex financial planning. Reach out to the International Franchise Professionals Group for recommendations on consultants that have been through their Certified Franchise Consultant training.
When you’ve found a franchisor you’re excited about, make sure you’re 100% clear on the details of the agreement and operations. Consult a legal expert and dig into these 3 crucial details for your potential franchisor:
- Training and Ongoing Support: Review their training materials, operations manuals, and marketing guidance. Make sure what you see matches with what you heard from franchisees you talked to during franchise validation.
- Financial Health: Review the franchisor’s historical financial statements with a CPA or financial expert to make sure there are no red flags and the company is in a good position for future years. Don’t get caught in a cautionary tale like some famous sub-shops, gyms, and other franchise companies.
- Franchise Disclosure Document (FDD): Have a legal expert review this with you and highlight any red flags, especially for items like royalties, performance requirements, territory restrictions, how you resolve disputes, and any requirements or restrictions on your exit if you need or want to sell.
Personal Financial Situation and Funding the Franchise
Franchisors look at your personal financial situation and usually require a minimum net worth. If you can barely meet the minimum requirements, buying a franchise is probably not a good idea for you. It could take a year or two until you start seeing profits, so you want to make sure you have savings or another source of income to live on.
If you have a nest egg to live on while your franchise gets going, the next thing to do is finance a franchise and determine the type of funding that works for you. You can use one or combine multiple funding options.
An example would be starting a warehousing and distribution franchise. An SBA loan might cover all the funding you need, or you could combine a vehicle financing loan for a fleet of trucks with an investment from friends and family for office supplies.
Here’s an overview on funding options for your franchise with some pros and cons:
Type of Funding | Financing Option | Pros / Cons |
Debt | SBA loan | Pros:
Cons:
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Traditional term loan | Pros:
Cons:
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Equipment or inventory financing | Pros:
Cons:
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Working capital loans | Pros:
Cons:
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Equity | Friends and family | Pros:
Cons:
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Personal cash | Pros:
Cons:
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Private equity | Pros:
Cons:
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Alternative | Home equity line of credit (HELOC) | Pros:
Cons:
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Retirement account | Pros:
Cons:
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Franchisor funding | Pros:
Cons:
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When you have a good financial situation, want to serve the local community by building a business that caters to their needs, and you get excited thinking about the fulfilling challenge and reward of being your own boss, then buying a franchise could be a good decision for you.
If you’re not ready to give up on social events, or don’t have the ability to take a financial risk right now, then buying a franchise is likely not a good idea currently. Instead, use this time to set yourself up for future success by putting money aside for the deposit and finding ways to optimize your routines so you can handle the work-life balance that comes with franchise ownership.