Embarking on the journey to purchase a franchise represents a significant step towards entrepreneurship, as it offers a structured pathway to business ownership within established frameworks. Whether you envision managing a boutique coffee shop or steering a restaurant of a larger fast-food chain, the allure of franchise ownership beckons with promises of autonomy and stability, as franchises are built leveraging a proven model for success. This guide helps you navigate through the intricate landscape of franchise acquisition, addressing pivotal considerations from financial feasibility to ongoing operational costs.
Can You Buy a Franchise with Limited Funds?
Buying a franchise with limited financial resources is not impossible, thanks to various financing avenues tailored to aspiring franchisees. Aside from traditional small business loans, compare some of the different types of small business financing to assess which option could help you achieve your goals of buying a franchise.
Business Acquisition Loan
A business acquisition loan is a viable option if you are looking to purchase an existing franchise. This loan type can provide substantial capital to cover initial costs.
Lenders often require a business plan that demonstrates the potential profitability of the franchise and your capability to manage it. Your creditworthiness will play an important part in determining your eligibility. Additionally, collateral may be required to secure this loan.
Small Business Administration (SBA) Loans
SBA loans are a good option for many aspiring franchisees. These government-backed loans offer favorable terms, lower interest rates, and longer repayment periods compared to conventional loans. SBA loans, such as those from the SBA 7(a) or SBA 504 programs, can be instrumental in covering a significant portion of your franchise acquisition costs. However, it should be noted that SBA loans’ favorable terms and low interest rates make them challenging to qualify for, and the approval process can take time.
Rollovers for Business Startups (ROBS)
A less conventional but highly effective method to finance your franchise purchase is through a Rollover for Business Startups (ROBS). This approach allows you to utilize your retirement funds to invest in your business without incurring early withdrawal penalties or taxes. By rolling over your 401(k) or IRA into a new 401(k) plan that buys stock in your franchise, you can access capital. ROBS can be complex and requires compliance with strict regulations, so it’s advisable to seek guidance from professionals well-versed in this process.
The Costs of Franchise Ownership
Understanding the costs associated with franchise ownership is crucial for financial planning and long-term success. These costs can vary significantly depending on the franchise, but they generally encompass several key components.
1) Franchise Fee
The franchise fee is an upfront payment made to the franchisor for the rights to operate under their brand name and utilize their business model. This fee can vary depending on the franchise’s reputation and market presence. The franchise fee often includes training, initial support, and the use of proprietary systems and processes.
However, even if you pay a franchise fee, you may need to cover operational expenses separately. For example, if you buy into a healthcare services franchise, you may need to purchase equipment on your own or take advantage of medical equipment financing.
2) Royalty Fees
Royalty fees are ongoing payments made to the franchisor, typically calculated as a percentage of your gross sales, often 4%-12% of your revenue. These fees cover the cost of continued support and operational guidance.
While royalty fees ensure you benefit from the franchisor’s ongoing innovations and brand strength, they can also impact your profit margins and should be carefully considered in your financial projections.
3) Construction
If your franchise requires a physical location, construction costs will be a significant expenditure. For example, you may need to pay for the construction of a new facility or the renovation of an existing space to meet the franchisor’s specifications. Construction costs can vary based on the size of the property, local building codes, and the design elements mandated by the franchisor.
4) Property Costs
Securing a prime location for your franchise is essential for attracting customers and ensuring high visibility. Property costs can include lease or purchase expenses, property taxes, insurance, and maintenance. These costs can vary greatly depending on the location, size, and type of property required.
Learn How BHG Financial's Business Loans Can Help You Buy a Franchise
BHG Financial provides tailored commercial financing solutions, offering small business loans up to $500,000.1,2 These loans feature flexible repayment terms extending up to 12 years1, so that you can finance some or all of your franchise purchase with affordable monthly payments. Plus, BHG’s loans come with dedicated, U.S.-based concierge service available around your schedule . Begin by obtaining a personalized estimate in just a moment with our payment estimator.
FAQs for How to Buy a Franchise
Is buying a franchise profitable?
Many franchises are profitable. However, profitability depends on various factors, including your personal experience with the business and management. Consider operational costs, projected revenue, business cash flow, and financing expenses before starting a franchise. Plus, business forecasting can facilitate a more informed decision.
How much cash do you need to buy a franchise?
You may need to make a downpayment to secure the rights to a franchise. For financing, you can secure a loan with no money down, though you might need to secure your loan to qualify.
Can anyone buy a franchise?
Anyone can buy a franchise, though running and operating a successful franchise requires management experience. Also, if you plan on financing the purchase of a franchise, you’ll need a strong enough credit score to qualify for financing.
