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Financial Goals

How to Successfully Join and Fund a Business Franchise

8 min read
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picture of author, Hometap TeamBy Hometap Team on March 14, 2022

Are you considering entering the world of small business ownership by joining an established franchise? It can be a great way to explore entrepreneurship without the pitfalls that come with starting your own business venture from scratch. And while franchise fees and costs can cut into revenue, you can certainly turn a decent profit and make a good living: the average franchisee’s pre-tax annual income is $80,000. Read on to learn about how to buy into a franchise, as well as the pros and cons, financing options, and more.

What Is a Franchise?

When you think of a franchise, your first thought might be of a well-known restaurant or retail chain, but a franchise is just a business in which the owner has licensed the operation, products, and brand so that individuals can open additional locations in exchange for what’s called a franchise fee.

Franchises differ from chains in that while chains are still completely owned, managed, and operated by the parent company, each franchise unit is owned by an independent investor. The franchisee pays royalties to the franchisor on a monthly or annual basis, but the amount varies by company; the typical range is 4–12% of total revenue.

Pros and Cons of Owning a Franchise

Buying a franchise can be a good idea, but like every financial decision, you need to consider what makes the most sense for you, your business goals, and your own personal situation.

Among the advantages of buying a franchise are that unlike a business you have to build from the ground up, a franchise has already been vetted and proven to be successful. You don’t need to create a business plan or test the product or service — the only major responsibility is to get the franchise up and running.

Depending on the brand, there’s a high likelihood that you’ll benefit from name recognition as well. As a result, franchises frequently see higher profits than independent businesses. You may also be able to save money when it comes to buying supplies, as franchisees usually have the opportunity to purchase products in bulk at a deep discount.

Finally, you have a built-in network for advice since, unlike a business you’re beginning completely on your own, there are often hundreds (and sometimes thousands) of other franchisees that share your experience to consult, and nearly every franchise has ongoing support and training in various areas of the business.

Of course, there are some drawbacks to joining a franchise. Regardless of industry, franchises frequently come with higher startup costs than those of an independent business — though some are less expensive than others, as you’ll see below. As part of the process of acquiring a franchise, you might be required to put a good amount of your own capital toward getting the business running, and as mentioned above, you’ll be paying a percentage of your revenue to the franchisor every month or year.

While you’re operating your franchise independently, you’ll still be expected to follow the rules, standards, and approved processes of your parent company, so if you’re hoping to showcase your creativity and out-of-the-box ideas, a franchise may not be for you.

Buying and Owning a Franchise Business

If you’re seriously considering owning a franchise, one good first step is to attend what’s known as a “Discovery Day.” These are face-to-face meetings, typically held at the corporate offices of the franchise company, and are a great way for prospective franchisees to not only learn more about the business, but also for the franchisor to get a better sense of who you are and what you will bring to the table for their company. It’s important to note, however, that Discovery Days aren’t usually open to the public — once you express interest in being a franchisee, the company typically invites those who they believe will be the best match.

Another major factor to consider is location, as this can make or break a franchise business. You’ll want to think about areas that get a good amount of car and/or foot traffic, as well as any other nearby locations of the particular franchise you’re interested in — you won’t want to run the risk of losing business to a fellow franchisee, or taking business away from them.

Best Franchise Opportunities

Since it does cost quite a bit of money to start a franchise (the typical range for startup expenses is $50,000–$200,000), picking a type that is on the lower end can be advantageous and help you bypass costs you might otherwise put toward getting a more expensive franchise up and running.

Currently, among the best low-cost franchises are Cruise Planners, a cruise-booking business you can run out of your home, Fit4Mom, a fitness franchise for moms, and Chem-Dry, a carpet-cleaning business.

While they may not be the cheapest to start, there are also more than a few franchises that tend to be the most profitable. You probably won’t be surprised to learn that half of the top 10 best franchises to buy are fast food businesses — including McDonald’s, Dunkin’, Popeyes, Sonic Drive-In, and Taco Bell. Others include 7-Eleven convenience stores, The UPS Stores, and hair salon franchises Great Clips and Sport Clips.

Regardless of the franchise you choose, you’ll need to build a budget that includes estimated costs and projected revenue. Consider additional expenses like marketing, utilities, and your own salary as well. Before you begin budgeting, it can help to talk to current fellow franchisees of the particular business, as they can provide guidance about realistic figures, along with any unexpected costs they faced.

Ways to Fund a Franchise

The process of securing a franchise loan or other financing is a bit different than other types of businesses, due to its fairly unique business model. You’ll need to make an initial investment, which includes the franchise fee, along with the costs to lease or purchase property, invest in necessary technology, hire staff, and set aside sufficient working capital.

A good place to start is with the franchisor themselves, as they may have a specific, established program that’s designed for the particular franchise and may include partnerships with lenders or direct capital. The major advantage with this option is that the funding you receive will typically cover most if not all of the initial investment required by the franchisor.

Outside of the franchisor, you have other financing solutions to consider. While there aren’t any dedicated franchise grants or loans, you can use a traditional loan from a bank or credit union or an SBA (Small Business Administration) loan. However, some of these loans have fairly stringent application and approval requirements, with significant red tape, and funding timelines can be quite lengthy.

small business financing options

There are also alternative franchise financing options to consider, including a home equity investment, which lets you tap into your home equity to get cash in a matter of weeks to cover your funding needs. With no monthly payments, this can be a great choice if you’re hoping to maintain cash flow flexibility.

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You should know

We do our best to make sure that the information in this post is as accurate as possible as of the date it is published, but things change quickly sometimes. Hometap does not endorse or monitor any linked websites. Individual situations differ, so consult your own finance, tax or legal professional to determine what makes sense for you.

Hometap is made up of a collaborative team of underwriters, investment managers, financial analysts, and—most importantly—homeowners—in the home financing field that understand the challenges that come with owning a home.

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