Buying a franchise can be an exciting way to step into business ownership, but one major question often arises: “Why wouldn’t I just start my own business? Why should I pay a franchise fee?”
It’s a fair question. After all, starting your own business from scratch means you keep all the profits, control the branding, and don’t have to answer to a corporate office. However, franchising offers unique advantages with a structured, proven system, providing a great middle ground. Here’s common top FAQ’s for potential franchise buyers to consider to help make an informed decision.
1.What Is a Franchise?
A franchise is a business model where an individual (franchisee) purchases the rights to operate a business using the branding, products, and operational methods of an established company (franchisor) with a track record. Thus, this model allows franchisees to benefit from the franchisor’s reputation, training, and support and not create a brand from scratch.
2. Why Should I Pay a Franchise Fee & Royalty? What Support & Training Will I Receive?
Franchisors typically offer comprehensive support, encompassing initial training, marketing assistance, operational guidance, and sometimes financial aid. This support is designed to help franchisees maintain brand standards and achieve business success.
The franchise fee is a one-time fee the franchisor uses to get your doors open. Once your doors are open, the Royalty, as a percentage of sales and Marketing fees are paid monthly to the franchisor for the on-going support for the life of the agreement. In return, you receive the following benefits:
✅ Proven Business Model – Skip the costly trial and error of starting from scratch.
✅ Brand Recognition – Customers already trust the brand.
✅ Training & Support – You receive In-depth pre-opening and on-going coaching on how to run the business, from operations to marketing and real estate if needed, reducing your learning curve for efficiency and growth from the experts.
✅ Bulk Purchasing Power – Lower costs on inventory and supplies.
✅ Marketing & Advertising – Gain exposure through national or regional campaigns.
✅ Operational Systems – Use tested software, hiring practices, and business strategies.
3. How Much Does It Cost to Buy a Franchise?
Franchise investments vary widely based on brand, industry, and location. Costs can range from a few thousand dollars to several million. These fees cover franchise fees, equipment, inventory, and last but not lease, working capital.
4. Can’t I Start My Own Business for Less?
Yes, but many underestimates hidden costs. Without a franchise’s proven system, new business owners often spend thousands on branding, marketing, pricing strategies, and operations—only to learn what doesn’t work. Many entrepreneurs invest thousands into marketing strategies that don’t work, struggle with pricing that either scares away customers or leaves them with razor-thin margins, or waste time and money on inefficient processes. Alternatively, franchising minimizes this risk with a tested model that gets you up and running faster.
5. How Much Can I Make?
Earnings vary based on the franchise, location, and how well you run the business. Some franchises disclose earnings in their Franchise Disclosure Document (FDD), but speaking with current franchisees about their experience provides a realistic picture of the return on investment (ROI). The Franchise ROI can provide insight into the financial viability of your investment. While initial costs may seem high, a franchise often yields a quicker path to profitability due to its proven business model, customer base, supply chain, and therefore, leading to lower operational costs and higher profit margins. Additionally, many franchisors provide performance benchmarks and financial reports that can help you project Franchise ROI. It’s also wise to consult with a financial advisor to understand the potential return on investment.
6. How Can I Finance My Franchise Purchase?
Each financing option has its pros and cons, so it’s important to evaluate them based on your financial situation, credit history, and business goals and seek professional advice:
- Traditional Bank Loans – These loans typically require a strong credit history and experience in the industry which stops most first-time business owners. They can be used for various purposes, including startup costs, equipment, and working capital
- SBA Loans – The Small Business Administration (SBA) offers several loan programs, with the SBA 7(a) loan being the most popular for franchise financing. These loans are partially guaranteed by the government, therefore, making them less risky for lenders and often offering favorable terms.
- Retirement Funding – A Rollover for Business Startups (ROBS) allows you to use your retirement funds to finance your franchise without incurring early withdrawal penalties or taxes. This can be a complex process, so it’s advisable to work with a professional to ensure compliance with IRS regulations
- Home Equity Loans – This type of loan typically offers lower interest rates compared to other types of loans, but they do put your home at risk if you default
- Franchisor Financing – Some franchisors offer financing options directly to their franchisees. This can include loans, deferred payments, or discounts on franchise fees. This type of financing can be advantageous as the franchisor is familiar with the business model and its potential.
- Alternative Financing – Online lenders and alternative financing companies can provide quick access to funds with less stringent requirements than traditional banks. These loans often come with higher interest rates but can be a good option for those who need fast financing or have less-than-perfect credit or want non-collateralized loans
- Personal Savings or Investors – Self-funding, family, friends or finding financial partners.
7. How Do I Choose the Right Franchise?
Selecting the appropriate franchise involves researching various industries, assessing your personal interests and skills, and evaluating the franchisor’s reputation, support system, and financial stability. Engaging with current and former franchisees can provide valuable insights. Choosing a Certified Franchise Consultant can help—at no cost to you! Consider:
- Your Interests & Skills – Choose a business you enjoy.
- Financial Requirements – Can you afford the initial and ongoing costs?
- Franchise Reputation – Research success rates and reviews.
- Support & Training – Look for strong franchisor support.
8. What Is the Franchise Disclosure Document (FDD)?
It’s the most important document! The FDD is a legal document that provides detailed information about the franchisor, the franchise system, and the terms of the franchise agreement. It includes 23 items such as the franchisor’s background, fees, obligations, franchisee support and financial performance. Indeed, the FDD is extremely important.
9. What Are the Risks of Buying a Franchise?
Like any business, franchises come with risks, including market competition, economic downturns, and the franchisor’s performance. It’s especially crucial to conduct thorough due diligence and consult with financial and legal advisors.
10. Can I Sell or Transfer my Franchise as an Exit Strategy?
Yes, and it’s a common exit strategy. Most agreements last between 5-20 years, depending on the brand and industry so sage advice to consider your long-term plans and exit strategies. This includes selling the franchise, passing it on to family members, or closing the business. It should be noted, the franchisor usually has the right to approve the new buyer.
The key is doing your research. These top FAQ’s for potential franchise buyers are a good start. Whether you buy a franchise or go solo, understanding the costs, risks, and potential rewards will help you make the right decision for your entrepreneurial journey. That’s where a Certified Franchise Consultant such as Scott Diener can help—at no cost to you! They’ll assess your skills, budget, and goals, then match you with the best franchise opportunities. This saves you time, money, and reduces risk by leveraging expert research and experience.
Want to explore your franchise options? Let’s set up a time to talk: Scott’s Calendar. You can also learn more about Scott Diener at Linkedin.
Scott Diener - MBA, CFC
