With more businesses turning to franchising to grow their brands, there are now numerous franchise opportunities at all price points. While you can invest millions of dollars in a brick-and-mortar restaurant or state-of-the-art gym, you can also buy a home-based franchise for well under six figures. But, is buying a budget-friendly franchise worth it? Do you get what you pay for? Franchise attorney Jeffrey M. Goldstein shares his thoughts.
In General, You Get What You Pay For in Franchising
While there are always exceptions, generally speaking, you get what you pay for in franchising. If a franchisor’s initial franchise fee is comparatively low or if a franchisor discounts its royalty fee compared to its competitors, you will want to make sure you understand why this is the case. The fees that franchisees pay to their franchisors are generally intended to cover costs like:
- Initial training
- Site selection assistance
- Grand opening support
- Ongoing support
- Improvements to the franchisor’s systems and technology
As a result, the less you pay, the less you can (and should) expect in most cases. While you certainly don’t want to overpay for your franchise, you also want to make sure that the fees you are paying are worth the investment.
With that said, a significant portion of the cost of buying a franchise is the initial investment needed to open for business. Opening a restaurant or gym is always going to be more expensive than opening a home-based business consulting or tax preparation franchise. On the other hand, if one franchise is “cheaper” than another because the concept is less expensive to get up and running, this is more of an apples-to-apples comparison that may be worth considering.
Your Due Diligence Will Be Important
Regardless of the costs involved in buying a franchise, it is always important to conduct thorough due diligence. If a franchisor’s fees are lower than its competitors’ fees, you will want to devote the time and effort necessary to find out why. If you will be paying for the right to use the franchisor’s brand and not much else, this isn’t necessarily a dealbreaker, but it is a factor that you will need to consider when deciding whether you are prepared to move forward.
Conducting due diligence involves not only communicating with the franchisor’s representatives and attending a discovery day, but also talking to several current and former franchisees. Do they feel like they got their money’s worth? If so, why? If not, why not? Oftentimes, the answers to these types of questions will be key factors for prospective franchisees who are trying to make up their mind about whether to move forward.
Do You Need to Buy a Budget-Friendly Franchise?
For prospective franchisees who are focusing exclusively on budget-friendly franchise opportunities, it is also worth examining whether this is a necessary choice. While there is absolutely nothing wrong with being financially risk-averse—and we encourage all prospective franchisees to make decisions based on their personal financial circumstances and level of comfort—there are various financing options available to those who may be comfortable extending themselves a bit further.
These include not only traditional financing opportunities with private lenders, but also government-backed loans for veterans and other qualifying buyers. Some franchisors offer their own in-house financing options as well. If you decide to seek financing, it will be critical to ensure that you have a clear understanding of the terms and conditions involved, and you should not hesitate to contact your franchise lawyer if you have questions.
Additional Considerations for Buying a Budget-Friendly Franchise
If you decide to pursue a budget-friendly franchise, there are several other factors you will want to consider as well. Fundamentally, buying a budget-friendly franchise is no different from buying a franchise at any other price point. With this in mind, some examples of additional factors you will want to consider include:
- The Franchisor’s Experience in the Business and in Franchising – How much experience does the franchisor have operating company-owned units (either before or after deciding to franchise)? How much experience do the franchisor’s executives have managing and growing a successful franchise system?
- The Size, Stability, and Growth of the Franchise System – How big is the franchise system, and where are its current franchisees located? Has the franchisor experienced a significant amount of turnover in recent years? Is the system growing at a rate consistent with the franchisor’s projections?
- The Franchisor’s Litigation and Bankruptcy Disclosures – Does the franchisor have any litigation disclosures in Item 3 of the Franchise Disclosure Document (FDD)? Does it have any bankruptcy disclosures in Item 4 of the FDD? If so, are these disclosures material to your buying decision?
- The Terms of the Franchise Agreement – What are the terms of the franchise agreement? Are they relatively standard for the industry? Are there any ambiguous or unreasonably one-sided terms that you will need to negotiate?
- Your Confidence in Your Ability to Grow a Successful Business – Based on what you are able to learn about the franchise system, are you confident in your ability to grow a successful business? Will the level of support you receive from the franchisor be enough? Do you believe that you will be able to recoup your initial investment before the initial term expires?
Again, these are just examples. There are numerous considerations involved in buying a franchise, and even if you are considering a budget-friendly franchise, there are still significant legal and financial risks involved. To ensure that you are making informed decisions, it will be best to work closely with an experienced franchise lawyer throughout the process.
Request a Free Consultation with Franchise Lawyer Jeffrey M. Goldstein
Are you thinking about buying a budget-friendly franchise? If so, franchise lawyer Jeffrey M. Goldstein can help you make informed decisions with your long-term best interests in mind. To get started with a free, no-obligation consultation, give us a call at 202-293-3947 or tell us how we can reach you online today.
