Do you want to start a franchise or buy an existing business? If YES, here’s a step by step guide to buying a franchise business with no money and no experience.
No matter the level of economic downturn that a country might be experiencing, new businesses will still crop up regardless and a number of these new businesses will be franchises as most new entrepreneurs are looking to key into the franchise opportunities that are available. Owning a business in the United States for some is regarded as attaining the American dream and franchising is seen as one of the fastest ways of attaining this dream.
However, no matter how much franchising might seem better than starting a business from scratch, it is vital that you take certain steps that will enable you buy a franchise that will be worth your financial resources and time because not all franchises succeed. However, a comforting statistic for franchises is that their rate of failure compared to new businesses is smaller.
5 Questions You Must Ask Yourself Before Buying Deciding to Buy a Franchise
It is not smart to buy into a business franchise without conducting a few investigations. A business may look attractive and profitable on the outside but it doesn’t necessarily mean that you are going to have a good experience when you buy into the business franchise.
In order to avoid unpleasant surprises, here are 5 important questions you must ask yourself before you buy into any business franchise.
a. Do I Like Being a Franchisee?
When you buy into a business franchise, you will have to lose some of your independence. You will have to follow the franchisor’s rules, principles and policies even though the business belongs to you. You will also have to accept the franchisor’s coaching and advice, and must be willing to share financial information and reports of your business with your franchisor.
If you are the type of business person who likes to be independent and make their own rules, then you have to carefully consider whether this is the best business model for you.
b. Can I Trust This Business/Franchisor?
The hallmark of a franchisee-franchisor relationship is trust. No matter how you choose to see it, the fact is that the moment you buy into a franchise, you become the franchisor’s business partner and it is almost impossible to do business with someone that you don’t trust. Try to learn as much as you can about the company’s values, ethics, history and beliefs as well as those of its managers and core employees.
You should also find out if the franchisor has had any litigations with any of its franchisees in the past and if so, the nature of such litigations so that you can have a general idea of how the franchisor treats its franchisees.
The more you know what the business and its staff are about, the easier it would be for you to decide if you can trust them enough to do business with them or otherwise.
c. Can I Afford The Fees?
Most franchisers would require that you pay some money upfront as franchise fees. This is how they make their money. These prices differ and some may require that you pay as much as $100,000. Costs of support, training, software, equipment, franchise transfers, liquidation and royalties may or may not be included in the initial franchise fees.
You have to find out the exact fees you will be required to pay, and check your bank account to be sure that you can afford these fees before you begin the process.
d. What Is The Turnover Rate?
If many franchisees have been selling off their business units, or closing down in the past 1-2 years, it is an indication that there is trouble with the business because no one likes to let go of a good thing. It helps to take a deep look at the Franchise Disclosure Agreement to see what the turnover rates are; note how many new franchisees have joined in the past few years, and how many have left. It also helps to understand the reason for their exit by asking questions from other franchisees.
e. How Much Can I Expect To Earn From This Deal?
The major reason why anyone would want to buy into a business franchise is for the financial benefits, hence it helps to find out whether you will be able to make enough financial gains to recoup your investments within your desired time frame.
You need to know how long it will take for your business to break even, and how long it will take for you to start making profit. This is very important if you plan on borrowing funds to buy the franchise.
In addition to these 5 questions, it also helps to understand what your exit strategy would be in case things don’t work out according to your plans.
5 Questions You Must Ask a Franchisor Before Buying a Franchise
1. How did the Franchise Commence and What is the Background of your Managers?
It is really important that you ask a question like this so that you can be really conversant with the franchising company. Questions like; who were the founders? Where did they get the inspiration to start the business?
- What are your standards for selecting a franchisee?
Franchisors characteristically have a list of qualifications and personality traits that are agreeable with their brand. It is imperative to examine these criteria and define whether you feel your personality and skill set fits within the system. This question is an all-important one because it gives you a clue into what the franchisee is really looking out for and his expectations.
- What Amount of Money do I have to invest before I Can Get Started?
The preliminary investment for starting a franchise can vary from a few thousand dollars to over a million. According to the FDD facts, Item 5 of the Franchise Disclosure Document (FDD) points to the fact the primary franchise fee and Item 7 details additional start-up costs such as real estate, equipment, licenses, etc. Be sure to deliberate on these items in depth with the franchisor so that you would have a clear understanding of your investment and what you will need financially to get up and running.
- How much liquid capital will I need to sustain the franchise until it breaks even?
This is a very potent question to ask as it puts you in a position where you know what you are up against, as well as what awaits you in front. Apart from the early start-up costs, franchisees need sufficient working capital for the first numerous months until the business hits gold, so it is imperative to find out the average amount of time it takes most franchisees to start spinning a turnover so that you can be financially prepared.
- What are the current fees and how do your royalties and marketing fees work?
When the purpose of a thing isn’t known, abuse becomes inevitable. This is why it is vital to comprehend your ongoing financial duties to the franchisor, together with whether or not you are obligated to pay royalty or other ongoing fees such as for advertising. Understanding this is indispensable for managing the financial health of your business.
Is It Possible to Buy a Franchise Business With No Money?
Owning your own business isn’t a bad idea, but what keeps people from ever achieving this is the dearth of finance as franchise opportunities require cash in order to be actualized. The fact that an entrepreneur doesn’t want to use his or her money to buy a franchise business does not mean that they don’t have money of their own; it might just mean that their cash is tied somewhere else and they therefore require money from other sources to fund the franchise.
Before you can however buy a franchise with or without capital, it is expected that you have conducted a thorough survey of the industry you intend going into. Once you have known what sector is likely to bring out the passion in you, you must then find out about their franchise capabilities and how they likely align to your own goals and objectives. Ensure that you engage the services of an attorney to help you draft contract documents that will ensure that the deal is properly structured.
There are few case scenarios where you might likely buy a franchise without having to use your own money; but one criterion by which this can be achieved is ensuring that you have written a comprehensive business plan that will convince those you are looking to get money from to invest in your business.
Below are some of the ways you can buy a franchise business without having any money.
i. Get a Passive Investor
There are many individuals in existence who have the money, but don’t want to put in the work and yet want their money to generate income for them. These are the kind of people who are likely to provide you the finances to buy a franchise
However, you will need to convince the investor that putting up the money you need for the franchise will bring them financial benefits within a definite period of time. This sort of option is a win-win because not only will you get someone to invest their own funds in buying you a franchise, but you also get a stake of the business as well without being in debt.
ii. Apply for Loan from a Commercial Bank
Even though banks do not like lending money to start-ups, there are certain businesses that banks cannot help but loan to regardless of their life-cycle and this is due to the projected and predictable revenue that the business is likely to generate. Therefore, it is important that you ensure that before using this option, that the proposed business will generate a steady stream of revenue that will allow you to pay back the loan in no time.
iii. Apply for SBA Loans
This is a loan program that is backed by the government where every year millions of dollars are issued out to various lending agencies so that those who are looking to start a new business, buy a franchise or buy an already existing business can do so.
There is however a limit to how much can be borrowed and there are also certain conditions attached before you can be deemed worthy enough to be loaned money. First, you must have a credit score that is over 680, a well written business plan and in some cases some collateral.
iv. Franchisor Assistance
This is one of the best places where you can get the money you need to buy your franchise especially in an economy that has experienced economic downturns. Search for franchises where the franchisors offer debt financing that will back the entire loan.
Ensure that you however check with the franchisor regarding any specific terms and what the repayment schedule would look like. Asides from lending you the money themselves, some franchisors who have long been in the game may have developed relationships with franchise finance companies or companies where borrowers are matched with lenders in order to ensure that you are able to buy a franchise with no money.
iv. Ask your Loved Ones for Help
In order to get your franchise up and running, you might consider seeking help from friends and family members. These sources can be easily convinced than others when it comes to getting your startup capital to buy a franchise. You should however note that financial help from family members and friends are likely to come with a string and it would be best if a document is drawn up in order to formalize any agreement reached.
The fact that you have no money at hand does not in any way mean that you should give up on becoming an entrepreneur. One thing to however note when looking to buy a franchise with no money down is that you must thoroughly research the franchise you intend acquiring, to find out how it would benefit you financially. Below is a step by step guide to buying a franchise in the United States of America.
Buying a Franchise Business – A Step by Step Guide
Step One – Self Evaluation
Before you even think about starting a business, you need to ask yourself what you are looking to achieve by doing so. This self-evaluation step is critical because running a business can be very tasking if you evaluate the hours you will put in to make your business profitable enough so that you can recoup your investment. Critically evaluating yourself will allow you to know what sort of business you will be suitable enough to run.
It will also allow you understand what your strengths and weaknesses are. Where you intend to locate your business, where you live, why you intend buying that particular franchise as well as what exit strategy you have are all important when evaluating available franchise opportunities. Also, you will need to know if you are one that can work with business methods that have already been pre-established with little or no variations.
Step Two – Work with a Franchise Consultant
A franchise consultant is one that has a thorough industry-specific knowledge that will therefore help you understand complicated business issues. This step is optional but necessary especially if you need someone to guide you through all the confusing information that you might have gathered.
Step Three – Evaluate Industry Categories
Before you get to pick any individual franchisor, it is important that you thoroughly evaluate all the industry categories. It is your impression of these categories that will enable you determine if an industry’s category will be right for you before looking to research on the individual companies in that category.
Step Four – Identify Individual Franchise Companies
Once you have chosen the right industry category, then it is time that you look at individual companies to determine which would most likely suit you based on attractiveness, brand and location. Take your research further by searching for negatives about the individual franchise companies which you have chosen.
Step Five – Know What Franchise You Can Afford
Once you have started researching on the franchise opportunities available, it is essential that you know how much your overall investment is likely to be. Some franchisors advertise an initial investment, what that means that the amount is not all you will be required to invest as there will be other costs that you will be expected to cover such as legal fees, working capital, supplies and build-out costs. Ensure that before making any down payment that you have a list of all the items that you will be making payments for and then make a payment once you are comfortable with the idea.
Step Six – Conduct Due Diligence on Selected Franchisors
Once you have selected the few companies that you feel align with your overall goals and objectives, then it is important that you make contact with these companies in order to get basic information about their franchise opportunities. The contact might be via their website or physically to acquire the materials you need.
Evaluate all the information you got from the various companies that you have contacted in order to determine if the new information acquired still aligns with yours. You should not bother committing time to those that do not completely align with your intended goals and objectives.
Step Seven – Contact Existing Franchisees
While trying to narrow down on which franchise company to work with, you can get vital information from already existing franchisees as they are in the best position to tell you about the business and what they think of the franchisors. It is from these franchisees that you will find out if your cost projections are realistic, how long it took for them to be profitable, and the effectiveness of the marketing materials provided by the franchisor.
Franchisors that offer the right amount of support and training to their franchisees should have leverage over those that don’t. Ensure that you talk to at least 10 existing franchisees either through phone calls or a visit as their various addresses can be found in their FDD.
Step Eight – Attend a ‘Discovery Day’
Once you have completed all the steps listed above, you should pay a visit to the franchisor’s headquarters as you will be able to get any bugging questions answered and will also meet people who will tell you how they intend to get your business up and running. It is important that you feel comfortable and also confident about the company that you are looking to start a business under.
You should also know that the visit also means that the potential franchisor is also evaluating you in order to know if you will fit in perfectly with their company as well. You should also know that there is a likelihood that other potential franchisees might be attending as well.
Step Nine – Work with a Qualified Franchise Attorney in Studying the FDD
If you are serious about buying a franchise, then to cover all legal ends, it is best that you consult with a franchise attorney who specializes in franchise law to help you understand what will be expected from you and from the franchisor.
You need to study all the available documents especially the Franchise Disclosure Document (FDD) before signing the franchise agreement. The FDD usually contains thorough information about the franchise, history of the company’s management, names and contact of the current franchisees, any litigation that the company might have experienced, other costs, type of training that will be offered by the franchisor, as well as a copy of the franchise contract.
Step Ten – Make your Decision and Write a Business Plan
Once you are done with all your research, then it is time that you decide what franchise system you will be looking to invest in and then write out a comprehensive business plan so that you will be able to present it to potential lenders especially as you will need a substantial amount of money to not only buy the franchise but to also cover expenses till your business starts turning in profit.
Also, creating a business plan will not only ensure that you are able to secure funding for your business but the business plan will act as a guideline for how you will run the business especially when it comes to taking certain actions and making certain decisions.
Step Eleven – Sign an Agreement
It is vital that you sign an agreement in the presence of a qualified franchise attorney who will go through all the documents on your behalf. Some franchise documents are rigid, while others are more flexible. That a franchise agreement is rigid does not mean that it won’t be to your best interest; however, there are certain terms that the franchisor must be willing to negotiate and in such situations, your attorney should be able to help you out as regarding the best solution for you.
Step Twelve – Secure Funding
There are various financing options available for any entrepreneur looking to start a business to consider. Even though you might have a convincing business plan with which to convince investors, it is essential that you have funds of yours as well as this tells potential investors how serious you are about your business.
Step Thirteen – Obtain all Necessary Permits and Insurance
It is necessary for you to understand that every industry has specific permits and insurance for businesses that intend to operate within it and they vary depending on the state or city that you will be operating your business from. Your franchisor will have all the necessary knowledge of the permits and insurance that you need in order to run your business without hitches. To be doubly sure, ensure that you still crosscheck with local authorities regarding what you might need.
Step Fourteen – Hire Staff and Get Training
The number of staff that you will hire will depend on the type of franchise that you are running. However, regardless of how many staff you intend to hire, your franchisor will offer both classroom and practical training to the franchisee and its managers.
Step Fifteen – Start your Franchise Business
Even though franchisors usually have defined processes as regards advertising and promotion; you will still have to do your own bit in promoting your business in order to alert new customers of your presence.