Franchising 101: How to Buy a Franchise
According to FranchiseConsultants.com, more than $1 trillion in products are sold annually through franchises in the United States. That’s why franchises remain one of the fastest growing segments of the American economy.
Today, there are more than 3,000 franchise concepts available in more than 50 industry segments, with 650,000 individual franchise outlets up and running.
What should you know if you want to buy a franchise? How easy is it to sell a franchise? Does it cost you anything to use a broker? Are so-called “glamorous” franchises more profitable than others? Is franchising less risky that starting your own business?
To find the answers to all of these questions, we interviewed Geoff Batchelder, who runs franchise consulting firm Compass Franchise Group, to get the scoop.
ISBB: What’s the best type of franchise to buy?
Batchelder: Our goal is to find an opportunity that will meet the specific needs of each individual we work with. To do this effectively, we first have to learn what those needs are. We will ask a series of detailed questions, such as:
- What are your reasons for wanting to own a business?
- What hours do you like to work?
- Where do you want your business to be located?
- How do you feel about managing people?
- How much capital do you have?
- Will you have partners?
- Do you want to build multiple units?
- Will you be involved on a full-time or part-time basis?
These are just a few of the many issues we’ll discuss with you over the course of our consultation process to help you buy a franchise or to sell a franchise. We can usually match our clients with a few opportunities that have characteristics consistent with the ones they’re looking for, saving them time and effort in the process. Sorting through the over 3,000 franchise business opportunities can be a long, confusing process.
How much will I make if I buy a franchise?
This is one of the first and most often asked questions we get. The hard truth is that it’s impossible to guarantee a certain return from a business investment. The good news is that with an established franchise system, you have many examples to get a picture of what your business might be able to earn.
But beware that not all earnings claims are equal. You need to study these in depth and dive into the details so that you fully understand where the numbers came from and what they really mean.
What are the different types of franchises?
There are four levels of franchising. It’s best to consider all aspects of each level before deciding which is the best opportunity for you:
1) Single-Unit Franchises – A franchisee has the right to operate one franchise unit. Most franchisees enter the world of franchising this way to understand the system before taking on more units.
2) Multi-Unit Franchises – The franchisee acquires more than one unit of the franchise, usually at reduced franchise fees. The risk can be lower because the franchisee can take advantage of economies of scale: by spreading fixed costs across multiple units, the locations may be more successful. A good sign of the health of the franchise is if many of the franchisees are multi-unit owners.
3) Area Development Franchises – This license usually grants the franchisee the right to open a certain number of franchises in a given area. There is usually a production schedule where the franchisee must open a certain number of franchises during a certain period. The franchisee has an exclusive area where no other franchisees can be allowed to open a franchise.
4) Master Franchises – A Master Franchisee has the rights to a larger area than that of an Area Developer. In addition to opening franchises at a much reduced franchise fee and royalty, the Master Franchisee can also sell unit franchises, multi-unit franchises, and area development franchises to others and usually receives a part of the royalty and franchise fee paid by each franchisee.
Will I have a protected franchise territory?
Yes. In most franchise systems, you’ll have some type of protected territory. It’s very important to make sure you understand how it’s defined and make sure that what has been communicated to you verbally is also spelled out in the franchise agreement.
Restaurants typically have small territories (3-10 miles), while service businesses will usually have territories that are based on the number of households and businesses, so in a densely populated area, it could be geographically smaller than a territory for the same franchise in a more rural area. Some franchise systems do not have protected territories, so that could be good or bad depending on the type of business.
For more advice on franchising throughout North America, contact Geoff Batchelder at CompassFranchiseGroup.com.