Pros and Cons of Buying a Franchise

What you actually buy when you buy a franchise

You buy the right to operate under a brand's name and system for a set term. You do not buy the brand itself, and the franchisor keeps control of standards.

The franchise agreement is the product. It spells out your territory, the term, renewal conditions, what you must buy from approved suppliers, and what you pay. Most are long contracts written by the franchisor's attorneys.

Before you compare anything else, request the Franchise Disclosure Document (FDD). It is the standard disclosure franchisors provide to prospective buyers, and it lists fees, obligations, litigation history and the franchisor's financial statements. Have an attorney who knows franchising read it with you.

The advantages that justify the fees

The main benefits are a proven playbook, brand recognition, training, purchasing power and a support network. These shorten the learning curve for a first-time owner.

• Tested systems. Operations, pricing, hiring and marketing are documented, so you are not inventing them.
• Brand pull. Customers already know the name, which can speed up early sales.
• Training and support. Many franchisors teach you the business before opening and help with site selection.
• Supplier terms. Group buying can lower costs on inventory and equipment.
• Peer owners. Other franchisees can tell you what really works.

These advantages are real but not guaranteed. A strong brand in one region may be unknown in yours, and support quality varies from one system to another.

The drawbacks that catch buyers off guard

Franchisees pay ongoing royalties, follow strict rules and can lose the business at term end. Costs add up beyond the headline franchise fee.

Watch for these:

• Royalties and marketing fees usually calculated on gross sales, so they are owed even in a month with thin profit.
• Limited control. Menus, pricing, vendors, remodels and hours may be dictated.
• Remodel and technology mandates that require fresh capital mid-term.
• Territory limits and rules on selling or transferring the unit.
• Term and renewal risk. The franchisor may change terms at renewal.

See our breakdown of average franchise fees to understand what the numbers include. Also review how to judge which franchises are worth buying.

One more cost to price in is the time. Many franchisors expect the owner to work in the business full time, at least at first, so count your own labor before calling the unit profitable.

Put the numbers side by side

Compare total startup cost, monthly royalties and the revenue you need to cover them. A franchise only works if the unit economics leave you a real profit after all fees.

Here is an illustrative example. Suppose a unit costs $250,000 to open and produces $600,000 in annual sales. If royalties and marketing fees take 10 percent ($60,000) and the rest of the operating costs take 82 percent, your owner profit is about $48,000, before debt payments. Change one input, such as sales running 10 percent lower, and profit nearly disappears.

Ask existing franchisees in the FDD's contact list what their actual profit looks like.

Who tends to do well, and who does not

Franchising fits people who follow systems, manage staff and want a path to scale. It frustrates people who want to experiment or set their own prices.

Ask yourself honestly:

1. Am I comfortable following a manual even when I disagree with part of it?
2. Can I put in the hours the system expects, especially in the first year?
3. Do I have enough cash reserve to cover slow months?
4. Do I want to own several units over time?

If you answered yes to most, franchising may fit. If you want to build something distinctive, an independent business may be a better fit. Our guide on how to become a franchise owner walks through the steps.

Talk to at least five current owners and two who left the system. Ask what they wish they had known, how often the franchisor changed rules, and how long it took to reach break-even. Their answers are worth more than any brochure.

Paying for a franchise and what funders look at

Franchise buyers often combine savings with financing. Funders look at your credit, the franchise's track record and your cash flow once open.

Ownership usually starts with a down payment from savings, with the balance financed. SBA loans are common for franchise purchases, are slower, and carry the lowest cost, so they suit buyers who are not in a hurry. Read how to get a loan for your franchise for the general process, including what lenders ask for.

ROI Funder does not place startup loans for businesses under 6 months old, so it is not the right fit for the opening purchase itself. It can help once a unit is established. ROI Funder considers 500+ FICO, 6+ months in business and $20,000+ monthly revenue, and products such as equipment financing or working capital can cover a required remodel, new equipment or seasonal inventory.