How to buy a franchise

Buying a franchise is a big commitment, and much of it can’t be undone. You pay a fee up front, borrow against the business and often your house, and sign a contract that usually runs for ten years. In return you get a brand people already know, a system that has been tested in other towns and a franchisor whose job is to help you succeed. The steps below are the ones experienced owners and the Federal Trade Commission recommend, in the order they tend to happen. Most buyers take a few months to get through them, and the ones who rush are the ones who most often regret it.

1. Set your budget before you pick a brand

The first question isn’t which franchise you want. It is how much cash you can put in, how much you can borrow and how long you can go without a paycheck. Every franchisor publishes an estimate of the total cost to open, from the franchise fee through build-out, equipment, opening inventory and working capital for the first few months. Among the well-known brands here, the typical low end of that estimate is $355,700 and the typical high end $770,500, but the spread is enormous: home-based service franchises can start under $100K, while a new drive-thru restaurant can pass $2M.

Plan to fund at least 10% of the total yourself. That is the minimum down payment for an SBA-backed loan on a new business, and many franchisors set their own minimums for liquid cash and net worth that are higher. Keep a cushion on top of the franchisor’s estimate too: many new owners take a year or more to break even, and the working capital line in the estimate is a guess, not a promise. The franchise cost calculator turns a brand’s range into the cash you need, a monthly loan payment and the royalty at the sales you expect, and the cost guide shows what is typical in each industry.

2. Decide what you want to run

A franchise is a job before it is an investment. A restaurant means early mornings, staff turnover and food costs; a home-care business means recruiting caregivers and fielding calls from families at night; a cleaning or lawn franchise means selling to customers and managing crews. Think about the work you would actually do on a Tuesday afternoon, whether you plan to run the business yourself or hire a manager, and whether you want a storefront or a van.

Be honest about the hours, too. Many brands require an owner to work in the business full time, at least at first. Others allow “semi-absentee” ownership with a general manager, but those usually need more money, because you are paying a manager’s salary out of the profits. Browse the franchise categories to see what each industry costs and how its brands compare.

3. Build a shortlist of three to five brands

With a budget and an industry in mind, narrow the field to a handful of brands you can investigate properly. The franchise finder filters every brand here by cost to open, industry, fee, royalty, size and growth, and the compare tool puts up to four of them side by side. Look at more than the cost. A brand’s royalty and marketing fee are charged on your sales for as long as you own the business, so a slightly cheaper brand with a higher royalty can cost more over ten years; the fees and royalties guide shows what is normal.

It also helps to know where each brand stands. The largest franchises offer proof that the model works in many markets, while the fastest-growing franchises often have more open territory. A brand that is shrinking isn’t ruled out, but it should be able to explain why.

Once you contact a franchisor, expect a sales process: an introductory call, an application asking about your finances, a series of calls covering the business, and eventually an invitation to a “discovery day” at headquarters. Franchise brokers and consultants can introduce you to brands, but they are usually paid a commission by the franchisor when you sign, and the FTC warns that this can steer buyers toward the brands that pay the most. Do your own research on any brand they suggest.

4. Get the franchisor’s filing and read it

Every franchisor selling in the US has to prepare a long filing that discloses its costs, fees, history, lawsuits, owners and finances. Under the FTC’s Franchise Rule, it must give you that document at least 14 calendar days before you sign a contract or pay it any money, and the FTC’s consumer guide says you can ask for it once the franchisor has your application and has agreed to consider it. Ask early: it is the best research document you will get, and it costs nothing.

The sections worth the most attention are these:

• Total cost to open and the franchise fee. Check what each line of the estimate covers, and what it leaves out, such as real estate or your own salary.
• Royalties and other ongoing fees. The royalty, the marketing fund, technology fees, renewal and transfer fees, and anything you must buy from the franchisor or its approved suppliers.
• Sales or earnings figures, if any. about 9 in 10 brands here share some. Read who is included: locations open a full year, the top third, company stores. The FTC says any claim about sales or profits must appear in this section, and that the franchisor must back it up if you ask.
• Locations opened and closed. Three years of openings, closures, terminations and transfers, plus contact details for current owners and those who left in the last year.
• The contract. The term, territory, renewal, what happens if you sell or quit, and whether you have to sign a personal guarantee.
• Lawsuits and the franchisor’s own finances. A pattern of suits by owners, or a franchisor losing money, deserves questions.

Every brand page on Franchise Tally summarizes the cost, fee, royalty, earnings figures and three years of location counts from the latest filing, with a link to the filing itself, so you can start there and read the full document for the brands that make your final list.

5. Talk to current and former owners

The FTC calls conversations with existing owners the most reliable way to check what a franchisor has told you, and owners who have been through it agree. The filing lists their names and phone numbers. Call several, not just the ones the franchisor suggests, and include owners who opened in the last two or three years, since they have the freshest memory of the costs and the support. Then call people who left. Some may have signed confidentiality agreements, but those who can talk often say the most.

Ask each one the same questions. How much did it really cost to open, and how long did it take? How long until you paid yourself? How do your sales compare with the figures the franchisor shares? What does the royalty buy you in practice? Would you do it again? Write the answers down, because after ten calls the details blur together.

6. Line up the money

Most buyers combine savings with a loan. The most common loan for a new franchise is an SBA-backed 7(a) loan from a bank or credit union, which can pay the fee, build-out, equipment and working capital; our SBA franchise loans guide explains the limits, rates and the 10% down payment. The brand has to be on the SBA’s list of eligible franchises first, and you can check any brand in our SBA franchise directory. Other routes include home equity, a rollover of retirement savings into the business, equipment leases and, for some brands, financing from the franchisor itself.

Don’t take a loan approval as a verdict on the brand. The FTC points out that a bank approving a franchise loan doesn’t mean the franchise is a good investment, and that some franchisors give lenders projections that are too rosy. The lender is judging whether you can repay, often with your house as security; it is still your job to judge whether the business will work.

7. Have a lawyer and an accountant review it

Before you sign, pay a lawyer who works on franchise deals to read the agreement, and an accountant to look at the franchisor’s financial statements and your own projections. The fee is small next to the investment, and a good reviewer will tell you which terms are normal for the industry, which ones are unusual and which ones the franchisor might be willing to change. The main economic terms, such as the royalty, are rarely negotiable, but territory details, opening deadlines and some fees sometimes are.

Check your state’s rules as well. Several states register franchise offerings or add their own protections for owners, and your state attorney general or securities regulator can tell you whether there are complaints against the brand.

8. Sign, train and open

When you sign, you pay the franchise fee and start the clock on opening. Most franchisors then run initial training, from a week or two at headquarters to several weeks in a working location, and help you find and build out a site. Opening takes anywhere from a few weeks for a home-based service to a year or more for a restaurant that has to be built from the ground up, and many agreements set a deadline. Brand pages here show each franchisor’s stated time to open where its filing gives one.

The first year is the hardest. Keep more working capital than the estimate suggests, use the franchisor’s support early and often, and stay in touch with the owners you called during your research. They are the people most likely to tell you what to fix before it becomes expensive.

Warning signs to watch for

A few patterns should make you slow down. Many locations changing hands in a short time can mean they don’t make money. A long list of lawsuits by owners, or by the franchisor against owners over unpaid royalties, suggests a strained system. A franchisor that recently went through bankruptcy, refuses to show you its operations manual even under a confidentiality agreement, or pushes you to sign quickly deserves extra caution. So does anyone who quotes you sales or profit figures that don’t appear in the filing. The FTC’s advice is to be ready to walk away from any franchise that doesn’t fit, and the 14-day waiting period exists so that you have time to.