Understanding the Franchise Purchase Process

If you’re looking to own and operate your own business, but at the same time, you want to capitalize on the goodwill and trademark of an established brand, purchasing a franchise is a great option. Sure, you’ll still need to hustle to make your business profitable, but the franchisor is invested in your success and will often provide the support, training, and expertise needed to help you get there.

First things first, though – you’ll need to purchase a suitable franchise. This article walks you step by step through the franchise purchase process, from selection to discovery day and closing.

1. Select the Best Franchise Opportunity 

When you purchase a franchise, the franchisor expects you to provide roughly the same customer experience they would get at any of the company’s other locations. They count on you to represent their brand and strengthen the company’s overall position. Thus, finding the right fit is crucial. 

Some things to ask yourself as you search the listings are:

• What is the total amount of money I can afford to spend (or borrow) to purchase a franchise?
• What industry experience do I bring to the table?
• What am I good at?
• What excites me so much that I could see myself doing it every single day?
• What do I want to avoid doing at all costs?

Answers to questions like these will help you narrow down the list of possible opportunities so that you don’t get overwhelmed by too many requests from potential franchisors at once. You can also come back to this step if none of the initial opportunities you’ve selected pans out.

Still feeling stuck? 

A helpful tip for getting started is to check out the franchise opportunity pages offered by several familiar brands like UPS, McDonald’s, Ace Hardware, and Dunkins’. This will give you an idea of the financial requirements and obligations needed to purchase a franchise. You’ll also learn how companies conduct their training programs and their expectations for franchisees. You can then better understand how deals are structured when you peruse the hundreds of franchises for sale on the market each day.

2. Complete the Franchise Application

Once you’ve narrowed down the franchises for sale to a shortlist of businesses that reflect your skills, passion, and industry expertise, the next step is to submit a request for more information to each entity on your short list. A franchisor representative will then meet with you to discuss an overview of the brand, including the company's mission and value proposition.  

If you like this introduction – i.e., you think this is a company you want to partner with – you’ll go on to fill out a franchise application. This is your opportunity to show the franchisor why they should give you a chance over other interested applicants. 

A franchisor's primary concern is your ability to afford to own and operate one of their franchises. In fact, they may spell out financial eligibility requirements right on their website. Be prepared to be transparent about your financial situation and submit any requested documents. If you are married, you must also submit documentation of your partner’s financial status as well. 

Since not everyone has – or wants to tie up –  a lump sum big enough to invest in a franchise, you may intend to finance your purchase with loans, either through a traditional bank lender or an organization like the Small Business Administration (SBA), which provides a number of loans to prospective franchisees. 

Beyond evidence of your ability to fund the purchase and start-up costs, the franchisor wants to know your level of commitment. Some appropriate things to mention are industry experience, successful past experience in running a business, and reasons why you are excited about their brand and the unique way the company delivers products and services to its customers.

3. Review the Franchise Disclosure Document 

Required by federal law, the franchise disclosure document (FDD) gives you a detailed look at the franchisor’s financial information. It also spells out the terms of your relationship with them should you become one of their franchisees. Franchisors must provide this statement at least two weeks before any money exchanges hands. 

Included in the FDD are 23 items, such as

• Three years of audited financial statements, including income statements, cash flow statements, and balance sheets. 
• An account of any litigation, whether finished or pending. 
• Notification of any bankruptcies of the franchise or its affiliates. 
• The franchisee’s estimated initial investment.
• The franchisee’s obligations to the franchisor, including any restrictions on the territory where you might operate the franchise, how much you must pay for royalties and marketing, and other stipulations about how to run the business. 
• Requirements about the franchisee’s level of participation in running the franchise.

Franchisors have the option to include financial results or projections (based on reasonable assumptions about the franchise’s potential performance) under Item 19 of the FDD.

The FDD also contains a contracts section that spells out agreements about financing, software licensing, product supply, and other contracts which must be entered into by the franchisee. The contract section of the FDD is not to be confused with the Franchise Agreement itself, which spells out the terms of the sale and is signed by both franchisor and franchisee at the time of closing. 

4. Understand the Logistics

As a franchisee, you will receive support, usually from the franchisor’s sales team, about how to make your franchise successful while at the same time following the proven systems inherent in its brand. 

Many businesses, like UPS, provide training programs to give you the operational skills needed to run one of their franchises. As a UPS franchisee, you’ll undergo four weeks of intensive training: an online overview of store operations, hands-on training to solidify the business principles you learned in week one, training devoted to learning how to manage the equipment needed to grow UPS’s printing services, and a final in-store review at a UPS Store Certified Training Center. 

McDonald’s has a far more extensive training program for new franchise owners. It involves 12-18 months of hands-on training in a McDonald's restaurant and 20 hours per week of self-directed part-time training. Their Field Operations staff ensures that franchisees follow the protocols for maximizing service, quality, and cleanliness.

Another popular franchise, Subway, does not mention training at all. They imply that franchisees have some freedom to help “evolve the brand” and stress that they prefer those who purchase multi-unit franchises. Whatever level of support you receive, you will be made aware of how the company’s protocols impact the business’s daily operations. 

5. Do Some Field Work

Once you learn how the company prepares its franchisees to become successful store operators, it’s time to hear what others have to say. What you learn firsthand from former and current franchisees can help you decide whether the franchise you are about to purchase is a good fit for your needs or more trouble than it’s worth. 

Not only should you have frank discussions with other franchisees – you should also plan to visit several different franchise locations to observe company culture and employee interactions with customers. You can learn a lot about the franchisor simply by watching how a store conducts its daily business.

Collecting feedback from individual store operators allows you to see in practice how items on the franchisor’s FDD are implemented. For this reason, reviewing the disclosures once more is always a good idea after you visit a few other franchises.

6. Sign the Franchise Agreement

Before the sale is complete, the franchisor may host a “Discovery Day” at their corporate office to let prospective franchisees like yourself mingle with other franchisees. This meeting gives you a final opportunity to ask questions. 

At this point, there is nothing left to do but sign the Franchise Agreement or the official sales contract between the franchisor and franchisee. This contract grants the use of trademarks, licenses, suppliers, and operating manuals – everything you need to run a successful franchise. 

When both parties sign the Franchise Agreement, it is a done deal. Since franchisors are legally allowed to amend the FDD until the time of closing, there may be some last-minute negotiations.  

The Bottom Line

Purchasing a franchise takes time – up to a year in some cases. Because you will represent the company’s brand and affect the growth potential of their enterprise as a whole, expect franchisors to vet you carefully before accepting your application. In turn, you’ll have an opportunity to learn essential details about the strengths and earnings potential of the franchise by looking at the FDD. 

It’s important to understand what industries pair best with your skillset and prior experience before you approach potential franchisors, so in essence, there are three vetting processes involved in purchasing a franchise – the franchisor’s vetting of the potential franchisee; vetting of the franchisor via the FDD; and the franchisee’s vetting of their own capabilities and values.