Opening a franchise allows you to flex your entrepreneurial skills without starting from scratch. You get a proven business model while still being your own boss. However, the startup fees can be pricey, and you must sign a contract committing to the franchisor’s playbook.
How to start a franchise business
Starting a franchise can take three to four months from your initial research to the final purchase, according to the Small Business Administration (SBA).(1) After you’ve signed the contract, it could take another two to six months until you’re ready to welcome customers.
That said, running your own franchise can be rewarding — and lucrative. These 12 steps can help guide you from conception to opening day.
1. List your top companies or businesses
When putting together a list of franchises you’d like to own, start by thinking about your favorite businesses. Consider your strengths, weaknesses and passions against what you think could make you money.
Franchises are available in nearly every industry:
- Business services
- Convenience stores
- Restaurant
- Real estate
- Educational and learning
- Entertainment
- Specialty retailers
- Travel agents
- Health and fitness
- Home healthcare
- Pet care
2. Research the franchise market
You can gather information about market conditions in your area, including demand and predictions for economic growth, through the SBA, the Census Bureau and private market firms to help you choose which franchise to open.
Take advantage of the resources at your local Small Business Development Center or a business school at a nearby college or university.
People who already own franchises can be invaluable resources. Ask about their experience and whether the process was worth it.
3. Evaluate investment and franchise costs
After you’ve pinpointed a market, research and compare the costs associated with your top picks. Franchise costs vary widely depending on the industry and business you choose to invest in, not to mention where you live or plan to do business.(2)
Note that some franchise owners — called franchisors — require a minimum net worth for franchisees.
When calculating the cost of starting your chosen franchise, look beyond upfront fees to costs that come with everyday business ownership.
| Franchise fees | $20,000 to $50,000, depending on size of market | One-time fee that covers your entry into the brand, including access to proprietary tools and systems |
| Royalties | 4% to 12% of profits | Franchisor’s royalties charged monthly or annually |
| Legal and accounting fees | $1,500 to $5,000 | Optional cost recommended to help navigate legal documents |
| Buildout | $1,000 to $100,000 or more, depending on franchise assistance | Costs toward physical location, including furniture, equipment, construction, zoning compliance and security |
| Working capital | Enough to cover 6 months recommended | Money used to run your business in the months and potentially years before you see a profit |
| Inventory | $20,000 to $150,000 | Costs to maintain consumer products or items required for business |
| Training and conferences | $4,000 to $8,000 | Training, conferences and other franchisor opportunities, including travel |
| Business licenses or permits | $50 to $400 | Fee for registering your business with your city or state |
4. Request a franchise disclosure statement
Reach out to the franchisor for a copy of its franchise disclosure document (FDD), which contains detailed legal information about its franchise group, along with financial data like the average gross revenue of its locations.
Sometimes, you can find FDDs available for free from online databases around the web. Just make sure you obtain the most recent version, as franchisors release a new FDD every year.
Also, consider the retention rates for your chosen franchise. A retention rate is the percentage of locations that close each year. Section 20 of the FDD breaks down closures by state so you can see how many have closed in your area compared to those in operation.
What else can I find in the franchise disclosure document?
An FDD covers more than 20 elements of buying a franchise, such as fee requirements, estimated initial investments and performance and revenue details.
It’s the legal information a franchisor is required to disclose to you, the franchisee, as part of due diligence before you invest.
The franchisor must provide you with the FDD at least 14 days before you sign a contract, though it’s a good idea to request a copy for your initial research. You can typically download a PDF of the FDD, though some franchisors might send you a hard copy.
5. Consider forming an LLC or corporation
Purchasing a franchise as a limited liability company (LLC) or corporation rather than as a sole proprietor provides financial and legal protection for your personal assets.
As an LLC or corporation, you aren’t held personally accountable for debt incurred by the franchise. If you remain a sole proprietor, you’re legally indistinguishable from your business — so you must cover business debt out of pocket, if necessary.
The same goes for lawsuits. As an LLC or corporation, your personal assets are covered if someone decides to sue your franchise.
6. Write a comprehensive business plan
A good business plan can help you analyze costs, predict sales and estimate profits before signing an agreement. Research what to expect in the months and years ahead to gather the information you need to take the next step — or pause if you’re not ready.
A successful business plan typically includes eight key components:
- Executive summary
- Company description
- Market research
- Organization structure
- Product research
- Sales plan
- Financial analysis and funding needs
- Financial projections
A business plan is necessary if you plan to apply for funding. Lenders want to see a viable plan for turning a profit and sustaining your business over the long haul, as it helps them evaluate if you’ll repay.
7. Get the financing you need.
If you don’t have the initial investment costs at the ready, you may need outside financing to launch or run your franchise. Many banks, the SBA and franchise-specific lenders offer financial help for would-be franchisees.
Other options include crowdfunding or lenders based entirely online. Online lenders like Kiva and Bluevine tend to leverage technology for more streamlined or automated approval processes. You could also use an online business marketplace like Lendio or Fundera to compare a network of funding options in one spot.
Some franchisors, like the UPS Store, Chem-Dry Carpet Cleaning and Cruise Planners, offer financing assistance, either through in-house programs or partnerships with third-party lenders. For example, Cruise Planners finances 50% of your franchise costs over the first 12 months, while Chem-Dry offers in-house financing for the initial licensing fee. This information is available in section 10 of the FDD.
8. Apply for the franchise and an interview
How you apply depends on the franchise you choose. For example, McDonald’s allows you to fill out an application online, while Chick-fil-A requires an expression of interest form to get the ball rolling.
Plan to attend interviews with the company, which allows time to parse through important details and determine if you’re a match for the franchise.
Expect questions that cover your plans, experience, finances and support, including your:
- Goals, timeline and territory
- Previous franchise and industry experience
- Reasons for choosing the industry and franchise
- Personal support system
- Financial capital and business plan
- Leadership experience
- An exit strategy
9. Review and sign the franchise contract or agreement
If, after your interview, you and the franchisor decide it’s a good match, it’s time for the paperwork. You’re required to complete a franchise contract, which is a binding legal document that details:
- Location and territory
- Equipment and operations
- Royalties and ongoing fees
- Advertising and marketing
- Trademarks, patents and signage
- Training and ongoing support
- Quality control and insurance
- Dispute resolution
- Renewal rights
- Termination and cancellation policies
- Exit strategies
Franchise contracts come with terms of five to 20 years. At the term’s end, you can often choose whether to renew the contract or discontinue your franchise.
At contract signing, you’ll likely need to also pay any upfront fees or initial investment expenses. Talk with the franchisor about preferred payment methods so you’re prepared.
10. Comply with state and local permit requirements
Most state and local governments require you to obtain licenses before launching your franchise — including health permits, occupational licenses, tax registrations and business licenses — or face fees.
While most states require the franchisor to apply for business licensing, a handful of states require a franchisee to register:
- California
- Connecticut
- Hawaii
- Illinois
- Indiana
- Louisiana
- Maryland
- Michigan
- Minnesota
- New York
- North Dakota
- Rhode Island
- Virginia
- Washington
- Wisconsin
You may also need to register for a license at the county or city level. Your franchisor should be able to help you anticipate permits required for your area and navigate the legal requirements. The SBA also provides information about franchise licenses that depend on your industry and state.
11. Build your location and assemble your team
The franchisor provides you with the essential elements for preparing your space — like signage, blueprints, fixtures and general decor — but you’re in charge of hiring contractors for the construction work.
You’re also responsible for hiring and training employees. Most franchisors provide training resources for franchisees, even sending a representative to help bring everyone up to speed about company branding, culture and expectations.
12. Stage a grand opening
In the days and weeks leading up to opening day, generate an awareness of your brand within the surrounding community. Most franchisors provide a marketing game plan and might even send a corporate team to help with your grand opening.
When preparing for your big day, a few tips can help make it a success:
- Choose a date with high traffic to attract as many people as possible.
- Send press releases to local media and advertise to your market.
- Invite friends, family and city officials.
- Decorate the store to attract attention and generate a festive feeling.
- Organize exciting activities on opening day, like door prizes or giveaways.
How to buy a franchise with no money
If you’re short on cash, you aren’t disqualified from starting a franchise — but you’re going to need to explore funding and financing to get from planning to opening day.
- Small business loan. Available amounts for small business loans range from $5,000 to $5 million, and rates start at around 5%.
- Personal loan for business. A personal loan typically comes with fewer requirements. However, they often max out at $50,000, and rates range from 4% to 36%.
- SBA loan. Loans from the Small Business Administration (SBA) are known for low interest rates but strict requirements and a lengthy application.
- Home equity loan or HELOC. Consider borrowing against the equity in your home as a home equity loan or line of credit. But because your financing is tied to your home, you risk losing your property.
- Rollovers for business startups. A rollover for business startups — or ROBS — allows you to invest retirement funds into your business without paying taxes, fees or interest. However, this puts your retirement at risk.
- Business partnership. Partners can assume part of the financial risk if you can’t fund the business alone. However, while you split the funding, you also split the profit.
Buying a franchise vs. starting a business
When deciding between buying a franchise and starting your own business from scratch, a major difference is the initial investment compared to the ongoing fees. Buying a franchise usually costs more upfront, while the expense of starting your own business varies widely but is typically cheaper in the beginning.(3)
How important is autonomy to you? With a franchise, you’re buying into an existing business with limited control, as you’ll need to follow strict branding, marketing and legal guidelines. Starting your own business, on the other hand, offers more creative freedom. However, that comes with the challenge of building a customer base from nothing.
Overall, buying a franchise means you’re part of a proven system with more restrictions but also with the benefit of brand recognition and corporate support. A new business means you’re building everything from the ground up, with more risk but also more freedom.
Case study: Opening a Critter Control franchise
Let’s say you want to open a Critter Control franchise in San Jose, California — a city with a population of about 1 million people. At an average of $582,828 gross revenue for that market, according to Critter Control, here’s what you could reasonably expect.
| Franchise fee | One-time fee | $70,100 |
| Average estimated initial investment | One-time investment | $116,550 |
| Operating costs | 56% of gross sales yearly | $326,384 |
| Royalties | 8% of gross sales due annually | |
To estimate your profits in the first year of opening, you’d subtract the franchise fee, initial investment, operating costs and royalties from the average gross revenue.
Average gross revenue
– (franchise fee + estimated initial investment)
– operating costs
– royalties
= First-year profit
$582,828
– ($70,100 + $116,550)
– $326,384
– $46,626
= $23,168
Using this equation, you can expect to pocket about $23,168 after your first year in business.
Because the franchise fee and initial investment are one-time fees, you should be able to make more money in the following year — some $209,818, assuming your average gross revenue stays about the same. As the business grows — and your gross sales increase — your profit is expected to increase over time, barring unforeseen circumstances in the market and industry.
Bottom line
Starting a franchise might be the right choice if you’ve got a solid game plan for raising funds and like the idea of following a tried-and-true business model. But if you’re still on the fence or want to research other options, browse our small business guides to starting, buying or growing a business.
Frequently asked questions
How much money do you need to start a franchise?
The cost of buying a franchise depends on various factors, such as the location and industry. A restaurant in New York will cost significantly more than one in a small town — even just for the real estate alone. Startup costs can range from $10,000 to $5 million, with the average falling between $100,000 and $300,000, according to APD.
How profitable is owning a franchise?
The profitability of a franchise varies significantly based on the brand’s strength, industry, startup costs and other factors. Data from 2017 shows that for food and beverage franchises, the median annual income is around $70,000 for two years or more in business and around $50,000 for startups. Only 34 percent earned more than $100,000, while many earned much less, according to a survey by the Franchise Business Review.
How do franchise owners get paid?
Franchise owners and franchisors profit from the business’ success. Franchisors earn income through the royalties and fees paid by their franchisees, while franchise owners generate income from the net profits of sales and services, which is the remaining revenue after deducting overhead expenses. These overhead expenses include the cost of equipment, inventory, staffing and maintenance of a physical location, including utilities like electricity and internet.
