Initial Steps & Tips for Buying A Franchise

One aspiration that many people have is to own their own business.  It provides the freedom of being your own boss, the challenge of building something on your own, the pride of owning a business, and hopefully the financial success that we all strive for.    Over the last 25 years, franchising has emerged as the main vehicle for most people to attain this dream. 

Why Franchising

initial steps and tips on buying a franchise

Franchising addresses many of the challenges and obstacles that present themselves when starting a business.  If you were to start a franchise business for the first time, there are many things you must consider.

  • Where is the best location?
  • Where do you find products and services?
  • How do you hire people?
  • What procedures do you need to run the business?
  • How do you market your business?
  • What tools do you need to operate a business?

With franchising, these questions have already been answered.  With years of experience and continuous improvement to the system, the franchisor will give you great guidance to help you run your business as efficiently as possible.  In addition, the franchisor will provide you with the buying power of a large company and allow you to maximize your profits from day one.

Choosing A Franchise

Most people will tell you to find something you are passionate about and buy a franchise in that industry.  Although it is good advice, keep in mind that the you are also investing a significant amount of money into starting your own franchise business.  You must ensure that you buy a franchise that will give you a financial reward.  The key to finding the right business is to decide why you want to own a business.  If it strictly to make a lot of money, you should research a broad range of franchises and make a decision based on the earning potential of the franchise.  If you are interested in a business based on your experience or passion, make a list of existing franchise opportunities that align with your interests and make the earning potential your secondary criteria for choosing an existing franchise.  Protecting your investment must be a priority.

Funding Your Franchise

Although most of us want to own a business, not everyone has the money to do so.  Most franchise opportunities will cost between $100,00 – $500,000.  This is a great investment range for those who are leaving their corporate job to pursue business ownership.  As a part of the bank’s decision to loan you the money, they are going to be looking at several criteria.   The two most important items are your credit history and the amount of money you have to invest.  Although there are several other factors, these are the two that can disqualify you immediately.  Regarding credit history, you will need a credit score in the mid 600’s and no bankruptcy in the last seven years.  As for the amount of money you will need (liquid assets), the banks will require you contribute approximately 30% of the total investment.  All financial institutions have varying requirements and the numbers and percentages presented here can vary.

Now that we have established a guideline for how much money you will need to buy a franchise, the next issue is where to get the money.  Although you may not have a stack of cash waiting to be invested, you may have a secret weapon.  Most people don’t realize there is a way to use your 401K money with no taxes, penalties, or interest.  Although you are using the money to start a business, you still have a 401K and you can return money to your retirement plan in several different ways.  Think of it this way, instead of investing your money in the stock market, you are investing it in your own business.

Tools Needed for Buying a Franchise

Since you are investing a good amount of money in buying a franchise, you must find the right tools for the process and experienced professionals to assist.

Business Plan – A business plan will be required to get a loan.  Most of all, it is a great tool for you to outline your path to success.  A professional business plan writer is recommended.

Lender – When looking for a lender, be sure to ask if they provide SBA loans and whether they will finance a startup, if applicable.  These two questions will save you a lot of time on the process.

Self-Directed 401K – If you would like to consider using your retirement funds to buy a franchise, you should seek the assistance of a company that has expertise with this program.

Lawyer – There could be several legal documents that will need to be reviewed such as the Franchise Disclosure Document, Franchise Agreement, Lease Agreement, and purchase agreement if buying an existing franchise.  An attorney can also assist you with forming a corporation and general legal advice for the life of your business.

Accountant – When buying a franchise, you will be overwhelmed with learning the business, running the business, hiring, managing employees, and more.  You should consider hiring an accountant in order to have a good grasp on the financial aspect of the business and focus on growing the business.  An accountant will also be a great source of sound business advice.

Business Insurance – As a part of the franchise agreement, you will be required to have a certain amount of insurance coverage for your business.