The Ultimate Guide to Buying a Franchise
There are over 4,000 registered franchises in the United States, with over 300 to 350 new ones popping up every year.
Aside from brands that you’ve seen or been a customer of — likely fast-food restaurants such as McDonald’s, or gyms such as Planet Fitness — the majority of other franchises you either:
- Never heard of
- Didn’t know it was a franchise
If you’re interested in buying a franchise and are new to the process, navigating 4,000+ brands is a difficult and understandably daunting task.
The fact that most websites in the franchise world look like they haven’t been updated since 1995 doesn’t help matters, either.
- The franchise ecosystem is made up of four key areas: franchise portals, franchise brokers, regulated investments, and the sales process.
- Franchise brokers are people who help you find a franchisor and narrow your search. They receive a commission from the franchisor if you end up buying the brand they recommended to you.
- The validation stage of the franchise sales process is when the franchisor provides contact information for current franchisees. It is important for buyers to speak with as many franchisees as possible in order to get a well-rounded understanding of what it would be.
- It costs anywhere from $100,000 to more than $1 million to buy a franchise.
- 4 Key Areas of the Franchise Ecosystem
- Understanding the Franchise Disclosure Document
- Choosing the Right Franchise
Do Your Research Before Buying a Franchise
Buying a franchise is a serious decision. Most brands require investments over $100,000. Some even require more than $1 million. With that amount of cash on the line, you don’t want to pick the wrong brand.
This article will give you an inside look into the franchise ecosystem, the franchise buying process, and how to actively filter your franchise search — so that as you research brands, you’ll understand the rules of the game and how to find a franchise as efficiently as possible.
4 Key Areas of the Franchise Ecosystem
The first place most people start when researching franchises is with a generic Google search such as “best franchises to buy” or “top franchises in America.” When you do this, you’ve effectively begun your franchise search.
Read on below to understand four key areas of the franchise research process that can (hopefully) make your search a little less frustrating.
1. Franchise Portals
When you’re looking into buying a franchise, the majority of Google results you’ll see are likely what is known as franchise “portals.” These are websites that basically function as an online directory of hundreds, if not thousands, of different franchises.
The website may allow you to segment by investment range and industry but typically won’t provide much more functionality beyond that. Unfortunately, the juicy details you’re likely in search of — such as the financial performance of franchisees and other metrics — are rarely provided on these websites.
Portals make money by charging on a per-lead basis, so they withhold information in order to get you to request information from different franchise brands. This is why they’re so eager to collect your name, email, and cell phone number.
That way, when you do submit a request for information, your contact info gets sent to each brand, and the portal makes anywhere from $30-$120 from each franchise you requested information from. Then, your phone gets blown up by all the different sales reps at each franchise.
I’ve been the salesperson on the other side of that phone call, so I know better than most that most prospective buyers don’t enjoy receiving those cold calls. Unfortunately, though, aside from my newsletter that analyzes emerging franchises, portals are the best online resource you have at the moment.
If you want to avoid having your phone and email taken over by commission-hungry franchise sales reps, I’d recommend finding brands you’re interested in and then researching them on their franchise websites individually before inputting any contact information.
Each brand does have what is called a Franchise Disclosure Document (FDD), which contains information relating to the initial investment, ongoing fees, expenses, and financial performance. Franchises typically send this document to you after you have a few phone calls, but you can actually find these documents publicly on a few different state websites:
I personally find Minnesota’s the least painful to use. Further down in the article, I’ll give more background on Franchise Disclosure Documents, as it is especially important during your active due diligence with a franchise brand. You can also check out my step-by-step guide for potential franchisees on how to find and review FDDs online without breaking the bank.
If you’d prefer more hands-on support in your franchise search, there is an alternative option to portals – and that alternative is franchise brokers.
2. Franchise Brokers
You may stumble upon websites that identify as “Franchise Consultants”, or “Business Match Makers”. These same folks have likely slid into your DM’s on LinkedIn with an automated message pitching you their services.
No matter what they call themselves, the reality is that they are a broker. Franchise brokers function very similarly to how real estate brokers work to help you find a house. This means that their services are “free” to you, as they instead receive a commission from the franchise if you end up buying a brand they recommended to you.
On the surface, it may seem like a great resource for you as the buyer:
You get help from someone more knowledgeable about franchises, they help you narrow your search and ultimately find a brand that works for you.
The cherry on top is it doesn’t cost you a dime! But as the saying goes…
“If you’re not paying for it, you are not the customer; you’re the product being sold.”
Remember what I said earlier, there are over 4,000 franchises in the United States, and 300-350 new ones emerging each year. Brokers typically only represent anywhere from 300 to 1,500 franchise brands (depending on the broker organization they associate with).
This means there are 3,000+ brands that they have either:
A) Never heard of or haven’t researched
B) Minimal incentive to tell buyers about it because they only receive a commission from the brands they represent.
Given this, brokers must be carefully vetted. Ethical brokers are out there, but even so, you need to make sure the brands they represent match what you’re looking for. This is not to say that all brokers are evil or not well-intentioned, but the incentive structure doesn’t always guarantee a pleasant experience for you as the franchise buyer.
3. Franchise Regulation
If you’re new to the franchise world, you may not know that franchises are a regulated investment. The Federal Trade Commission (FTC) is the regulatory authority in the franchise world, and they have laws in place to protect buyers from fraudulent franchisors.
This is relevant for you because you’ll likely want to ask questions of the franchisor, such as, “how quickly can I make my money back with your franchise?” or “how long is the payback period?”
Unfortunately, due to regulations, franchises are unable to make any earnings claims other than what is stated in their FDD. The earnings claim section of the FDD is called Item 19, and it’s based on past performance (if it includes any information at all).
So while you can use that past performance data to create an educated guess about how the franchise would perform in your market, the franchisor cannot comment on it or make any guarantee.
As you’ll see later on, this is why the validation stage of the franchise sales process is the most important for you as the buyer – because existing franchise owners are considered neutral 3rd parties that are legally in the clear to answer any question about their financials.
While it can be frustrating from a research perspective, these regulations are in place to protect would-be franchisees from being coerced into buying a territory based on embellished or straight-up fraudulent financial projections, which wasn’t uncommon previously before these guardrails started being enforced.
4. The Franchise Sales Process
When you get serious about learning more about an individual franchise, you will have to speak to members of their development (franchise lingo for “sales”) team to formally begin that process. This is a must, regardless of whether you used a broker, a portal, or submitted information through the brand’s franchise website.
While a few franchises might do things a bit differently, the majority of brands use the same 7-step process. I’ve outlined this below, as it’s a structure you’d have to follow for any brand you reach out to:
This call helps you get a basic understanding of the services the franchise offers consumers, the financial requirements, support provided, training, etc. It’s typically 15-30 minutes long.
You can think of it as the first round of an interview for a job – it’s more of a “get to know each other” kind of conversation, and also a chance for the franchisor to do a quick psycho test on you.
Submit an Application Form
After the introductory call, most franchisors will send you a form to be filled out online. This is ultimately to learn more about you and assess if you’re a good fit for their brand. The form will ask you to input financial information about yourself, such as your net worth, amount of cash on hand, any debt, etc.
The brand will want to know that you have the means to fund investment before spending more time with you.
FDD Review Call
This is where you get to learn specific details about the franchise, such as the initial investment range, royalties, financial performance representations, system-wide growth, and more.
This information comes via the Franchise Disclosure Document (FDD). The FDD is a legal document that every franchise is required by The Federal Trade Commission to have. Each one is structured with 23 sections, known as “items’, followed by pages of contractual information that are primarily meant for a franchise attorney to review.
Brand Follow-Up Call
If you’re still interested in the franchise following an FDD review, there’s usually another phone call with the executive team.
This call allows you to ask more questions, whether it be regarding the FDD, the possible territory you intend to operate in, or otherwise. It also enables the franchisor to get even more familiar with you.
This step is when the franchisor provides you with contact information for current franchisees. Keep in mind they will very likely recommend you speak to the franchisees who just so happen (😉) to be their top-performing franchise owners.
Be sure to do thorough due diligence by speaking with as many franchisees as possible.
Remember, current franchise owners are your BEST resource, as you get to ask them any questions, and can hear insights from people who already own & operate the business!
Franchisors are required by law to directly provide you with contact information for current franchisees. This is the MOST BENEFICIAL step for you, as you get to hear from people who already own & operate the franchise!
While there are many questions you’ll want to ask an existing franchise owner on this phone call, here are ten pointed questions you can use:
- Are sales cyclical?
- Are you happy with the franchisor?
- Is customer retention typically high?
- How many hours a week do you work?
- Are you happy that you bought this franchise?
- Do you have an overly concentrated customer base?
- What’s the biggest mistake you’ve seen other franchisees make?
- How does the franchisor help with marketing, lead generation, etc.?
- Is there anyone working for you (life partner, kids) that isn’t on the payroll?
- Do you find the income level you’re making is in line with what was disclosed to you in the FDD?
This is an in-person meeting at the brand’s headquarters, where you get to meet the executive team and get an in-person feel for the brand. Attending a franchise discovery day is often the final step — and allows you to meet the franchisor, and the franchisor gets to meet you in real life.
Take advantage of this day to really assess the franchisor as a business partner. Think, could you see yourself enjoying working with them for the next 5-10 years? Can you trust them? Good franchisors will be asking the same questions of you.
And remember, while you’re inside the locations, really get a feel for what it’s like to be inside the business and if the atmosphere is exciting to you!
Letter of Intent, or Declining the offer
After Discovery Day, you are usually expected to make a decision within a few weeks, as it is the end of the due diligence process.
Franchises will often do this not to rush you but for you to avoid paralysis by analysis, something that often happens to first-time business buyers.
This is why it’s important to make sure you don’t book a Discovery Day unless you feel you have learned everything you can and that meeting the executive team is all you’ll need to do to decide if the brand is the right fit for you.
Now that you’re an expert on the franchise ecosystem and the resources at your disposal, let’s develop a framework to quickly determine what brands are a potential match for you.
Understanding the Franchise Disclosure Document
While you should read through all of the 23 items in the Franchise Disclosure Document (these are required to be written in plain English), there are a few that are particularly important and/or interesting:
Item 2 – Business Experience
Contains the business experience of the franchise executives.
Item 3 – Litigation
Tells you if there have been any lawsuits within the franchise organization, including ones between the franchisee and franchisor.
Item 4 – Bankruptcy
Tells you if there have been any bankruptcies within the franchise organization.
Item 6 – Fees and Royalties
Goes through ongoing costs that you would have to pay as a franchisee, such as royalties, advertising fund contributions, and more.
Item 7 – Initial Investment
Discloses the potential investment range that it will take to open a new franchise.
This covers everything from construction, lease security deposits, startup marketing costs, etc. Many brands will also use a line item called“additional capital” to build in some expected costs for franchisees in the first 6-12 months as they’re ramping toward cash-flow positivity.
Item 19 – Financial Performance
Discloses data on how franchise locations performed.
There is no requirement from the FTC for brands to disclose data, so you won’t always find any information in this section. When brands do include data, it could include information like average revenue per location, to detailed profit & loss statements.
If a brand doesn’t have any information disclosed in item 19, you’ll definitely want to ask questions of the franchise development team to understand why!
Item 20 – System Growth
Shows the previous three years’ growth in terms of the number of locations – both company-owned and franchised.
Understanding the growth rate, whether it’s positive or negative, can help illuminate the current trend within a franchise brand.
Choosing the Right Franchise
As I mentioned in the beginning, there are over 4,000 franchises in the United States. That’s A LOT of options to choose from.
While you’ll naturally cut down that number by focusing on the specific industries and business types (i.e. B2B vs retail) that you’re interested in, there will still be far too many options for you to research in an efficient manner.
To expedite your search and prevent you from spending a ton of time researching franchises that you ultimately won’t move forward with, you need to create a preliminary checklist that you’ll use for every franchise that catches your eye.
The goal of the checklist is to get you to answer three core questions, so you can decide quickly if the franchise is worth exploring any further.
If the franchise doesn’t meet at least two of the specific criteria, you can cross them off the list before wasting too much time. The three questions you need to answer are as follows:
1. What is Your Budget?
First and foremost, you need to be honest about your budget for your franchise investment. I personally would love to own a bunch of Wendy’s and eat a bunch of Baconators at my own restaurants whenever I wanted! However, a single location can cost as much as $3.7 million just to open the doors, which at the moment isn’t feasible for me – even with financing options.
Everyone’s financial situation is different, so it’s up to you to determine the value of all your liquid assets (cash, stocks, bonds, etc.), and of that, what amount you’d be willing to allocate to buying a franchise.
Beyond the assets you have on hand, it’s not uncommon for franchise buyers to explore financing routes such as applying for a bank loan, bringing in a business partner who provides up-front capital, and (for the more risk-averse) rolling over a portion of retirement accounts such as a 401k or IRA,
This is the most important question to know the answer to; otherwise, you may spend months exploring a business that you ultimately can’t afford.
2. What Type of Franchise Ownership Are You Looking For?
Different franchises demand different forms of ownership. There are generally three forms of ownership in franchising, and you should know which one is most attractive to you as an entrepreneur, and then seek out franchises that support that form.
The Owner-Operator model is a very common form of franchise ownership. This means that you are the owner of the business, and also heavily involved in the day-to-day work of the franchise. Many home services and B2B franchises require owner-operators, as the franchisee is the one driving sales and networking opportunities at a local level.
While some view owner-operator franchises as just “buying a job,” others find it attractive as it can be an escape from the rat race of corporate America, and gives you the freedom of being your own boss.
Multi-Unit owners are a different form of ownership that not every franchise allows for.
Multi-unit operators buy and oversee multiple locations of certain franchises, and will often own multiple brands as they build their franchise empire (check out Guillermo Perales at Sun Holdings for just how big a multi-unit operator can get!).
This form of ownership requires a lot of capital to fund consistent expansion, and a sophisticated franchisee to manage different locations, numerous employees, maintain a positive company culture and keep the financial statements organized as the business grows.
Certain brands don’t allow franchisees to own more than 1-2 units, as they want to ensure that every single location has the dedicated focus of a sole franchisee.
Semi-Passive ownership is the last form of franchise ownership you often see. These are businesses that require some leg work to launch and get off the ground, but once they are opened, and you have a team in place, you don’t need to work full-time on it.
In fact, many people are able to keep a full-time job while getting a location or two launched on the side, and the franchise serves as an alternate income stream for them.
Now keep in mind that any franchise that advertises as truly passive, and not semi-passive, should sound off some alarms in your head. A truly passive investment would be purchasing shares of a company via the stock market – where you quite literally don’t have to do anything and can watch the value of your shares rise.
Any franchise will require some work even after you have a team in place, as there will be natural employee turnover from time to time, and you, as a business owner, will want to keep an eye on the key KPIs driving your business.
Nonetheless, if you execute and build a strong team, it’s not unrealistic to think that you can manage a location or two of certain franchises and dedicate just 10-15 hours per week.
3. What Skills Do You Have That Will Make You Successful?
While the answer to this question is less important than the prior two, it’s helpful to do an objective evaluation of what your strong points and weak points are, and see how they can potentially help or hurt you in your franchise journey.
For instance, if you’ve spent 10 years as a deal maker in a corporate environment, it’s only natural to think that a B2B sales franchise would come easier to you. On the other hand, if you know in your heart of hearts that you aren’t comfortable or wouldn’t be happy in a sales-intensive role, then you should look to avoid franchises that require that.
With that said, though, many quality franchises don’t require their franchisees to have experience in a specific industry. Part of the beauty of franchises is that they can provide the support and training, as long as you come prepared to work hard and keep an open mind.
I’m a big believer in the power of a strong work ethic and an open mind, so don’t be discouraged from taking a look at a franchise just because you don’t have industry experience. Yes, it would be nice if your skill set directly aligns with the franchise, but limiting yourself to just your prior experience would be short-sighted.
If previous entrepreneurs did so, Ray Kroc would have never pursued McDonald’s, Howard Schultz would have given up on Starbucks, and the list goes on.
Now that you know what to include on your preliminary checklist before buying a franchise, it will make your vetting process smoother and prevent you from exploring a brand too deeply that isn’t a good fit.
Hopefully, you enjoyed this article breaking down the franchise ecosystem, the franchise buying process, and how to actively choose the right franchise based on criteria and information that is unique to you.
If you want to keep up to date with new emerging franchises, remember to subscribe to The Wolf Report.