How to Buy a Franchise: What You Need to Know

Introduction

Franchises account for approximately 10% of all US businesses and generate over $800 billion in annual revenue. Buying a franchise gives you access to a proven business system, established brand, ongoing training, and marketing support. However, franchises also come with significant obligations, fees, and restrictions that every buyer must understand before signing.

Understanding the Franchise Model

A franchise is a license to operate a business using an established brand's systems, trademarks, and operational procedures. In exchange, you pay an initial franchise fee (typically $20,000-$50,000) and ongoing royalties (typically 4-8% of gross revenue).

Types of franchises:

• Product distribution franchises: You sell the franchisor's products (auto dealerships, gas stations)
• Business format franchises: You operate using the franchisor's complete business system (fast food, hotels, fitness centers)
• Conversion franchises: You convert your existing independent business to a franchise brand

Total investment ranges widely by brand — from $50,000 for a home-based service franchise to $2 million+ for a major fast-food restaurant.

The Franchise Disclosure Document (FDD)

Federal law requires franchisors to provide a Franchise Disclosure Document at least 14 days before you sign any agreement or pay any money. The FDD contains 23 items covering:

1. Franchisor background and litigation history
2. All fees (initial, ongoing, advertising, technology)
3. Your obligations and restrictions
4. Territory rights and exclusivity
5. Financial performance representations (Item 19 — not all franchisors include this)
6. List of current and former franchisees with contact information

Always have a franchise attorney review the FDD before you sign. This typically costs $2,000-$5,000 and is the most important investment in your franchise evaluation process.

Evaluating a Franchise Opportunity

Before committing, evaluate the franchise opportunity from multiple angles:

• Call existing franchisees: The FDD lists all current franchisees. Call at least 10-15 of them. Ask about profitability, franchisor support, and whether they would make the same investment again
• Visit operating locations: Spend time observing the business in action at multiple locations
• Calculate total investment: Add up the franchise fee, build-out costs, equipment, inventory, working capital, and living expenses during the ramp-up period
• Understand territory rights: Know exactly what geographic protection you receive and whether the franchisor can open competing locations nearby
• Review the operating manual: This is the playbook you'll follow daily. Make sure you're comfortable with the level of control the franchisor exerts

Financing a Franchise Purchase

Franchises are often easier to finance than independent businesses because lenders recognize established brands.

• SBA loans: Many franchise brands are on the SBA's pre-approved franchise registry, streamlining the loan process
• Franchisor financing: Some franchisors offer direct financing or have relationships with preferred lenders
• ROBS (Rollover for Business Startups): Allows you to use retirement funds to invest in a franchise without early withdrawal penalties
• Home equity loans: Can provide additional capital at favorable interest rates

Expect to need 20-30% of total investment in liquid capital. Lenders want to see that you have skin in the game and enough reserves to weather the startup period.

Final Thoughts

Buying a business is a significant financial and personal commitment. Take your time, do thorough due diligence, and work with experienced professionals — a business broker, attorney, and accountant — to guide you through the process. The right acquisition at the right price can be a life-changing investment.

Browse businesses for sale on BuyThe.Biz to start your search, or visit our Q&A forum to ask questions and get advice from experienced business owners and brokers.