Key Tips for First-Time Franchise Buyers

Many people dream of owning their own business. One option to speed up the process is becoming a franchisee of an established brand. This allows entrepreneurs to build on a proven model and use it to guide their business decisions.

However, owning a franchise is not a quick path to wealth. The widely shared claim of a 90% five-year success rate for franchises is a myth. While franchising offers some benefits, franchisees must work just as hard as traditional business owners to succeed.

The following tips provide helpful advice for those considering buying a franchise for the first time:

1. Do a Thorough Self-Assessment

   One of the appealing aspects of owning a business is being your own boss. But as a franchisee, your freedom is somewhat limited. You can set store hours, hire employees, and set prices, but your creative control is constrained. Your store must look and operate like other locations in the franchise.

   If you’re comfortable following guidelines and working within a set structure, a franchise may be a good fit. But if you’re looking to bring your own vision to life, independent ownership might be better.

2. Do Your Own Research and Analyze the Results

   Franchises often highlight the success of their top performers, making the opportunity seem very lucrative. While some franchisees do earn six-figure incomes, it usually takes years of experience, building a strong team, and opening multiple locations to reach that level. 

   In reality, Franchise Business Review found that 37% of franchise owners make less than $50,000 a year—barely above an entry-level salary. This isn’t to discourage you but to provide realistic expectations. Becoming a franchisee isn’t a shortcut to instant riches. Success requires skill, hard work, and a solid business model. Dig into the company’s financial health and long-term growth prospects before making a decision.

3. Evaluate the Local Market

   Assessing the local market is crucial when considering a franchise. Look at the business’s current market and how it might evolve. Consider what share of the future market your franchise could capture.

   For franchisees, market research can be more complex. You may compete with other stores in the same chain, and the franchise may control your marketing spend. This means that even in a potentially promising market, external factors may limit your growth.

4. Understand the Costs of Starting a Franchise

   Starting any business requires a significant initial investment, and franchises are no exception. Consider these specific costs:

Franchise fees: The one-time fee to become a franchisee can range from $10,000 to over $100,000, with an average fee between $20,000 and $50,000.

Startup expenses: In addition to the franchise fee, you’ll need money for lease costs, renovations, equipment, inventory, and covering operations for up to six months. Many of these costs will require financing, so be cautious about taking on too much debt.

Covering early losses: Most franchise locations aren’t profitable right away. It may take months for revenue to exceed expenses. Additionally, you’ll likely need to pay royalties of 5% to 6% of revenue to the franchise, which can affect your profitability.

5. Ensure the Franchise Aligns with Your Goals

   Once you’ve assessed the costs and market and are ready to move forward, it’s time to set clear goals. Are you looking for steady income and willing to work hard for it? Do you want to open multiple locations and become a top performer in the franchise? Or is your goal to buy the franchise, improve its operations, and eventually sell it at a profit?

Final Thoughts

Owning a franchise offers some advantages by leveraging an established brand, but it also requires hard work. By reflecting on your goals, doing thorough research, assessing the market, understanding costs, and ensuring alignment with your objectives, first-time franchise buyers can increase their chances of success.

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