You’ve toyed with the idea of running a business. You have a strong management background and believe that you could succeed as an entrepreneur if you had the right business model. However, you don’t want to — or can’t — buy an existing business or start one from scratch.

If the above description resonates with you, you might be a future franchisee.

Question mark

Franchise or startup?

Both paths involve potential risk and reward.

Franchises are popular for good reason. A franchise investment can feel less risky than a startup in that you’re working with a proven business concept, operational model, and in many cases, regional or even national brand recognition. You’re given a playbook to guide your every action.

But financing and running a franchise can still be financially risky, with hefty start-up and royalty costs (as high as 8 percent) along the way. Plus, franchisees are limited in what they can do creatively within their budgeting, marketing, and even employee training efforts.

If you’re seriously considering the franchise route, there is much research to be done before you make an investment. You’re in the right place because we’re here to help you with two important components of your decision:

1. How to choose a franchise
2. How to pay for a franchise

We’ll incorporate lender insights, franchise consultant advice, and first-hand franchisee stories along the way.

Balanced scales

1. How to choose a franchise

Selecting a franchise investment involves a number of considerations, several of which we'll discuss here:

Investment amount
What industries are doing well
What industries are struggling
Local market research
Company reputations
Franchise consultations

First, let’s define some key terms. Sometimes “franchise owner” is used to describe a person operating a franchise location, but they don't actually own the franchise. Here are the proper definitions according to Investopedia:

Franchisor: The original or existing business that sells the right to use its name and idea; the franchise owner.
Franchisee (pronounced fran-chai-zee): The individual who buys into the original company by purchasing the right to sell the franchisor’s goods or services under the existing business model and trademark; a small business owner who operates a franchise; a franchise partner.
Franchise: A joint venture between a franchisor and franchisee.

Investment amount

It’s important to know what your financial limits are so you can be realistic about your options. Not everyone has $1 million to spend to become a McDonald's or Taco Bell franchisee.

Startup costs will include the following — and this doesn’t include additional ongoing costs you’ll want set aside beforehand:

Franchise fee (basically an entry fee compensating the franchisor for their hard work in building the brand)
Territory fee
Real estate costs (leasehold improvements, construction costs, etc.)
Insurance
Taxes
Licensing, accounting, and legal fees
Equipment (industry-specific and general office)
Inventory
Work vehicle(s)

While you can find some rare opportunities in the $10,000 range, most franchises run from about $50,000 to $200,000 in startup costs. And, of course, there are plenty of franchise investments that will cost you in the millions.

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Highlight: Plenty of lower-cost franchise opportunities require an initial investment of around $50,000 or less.

Here are some examples that all rank in Entrepreneur's Franchise 500 list:

Destination Athlete ($28,300–$93,610)
JAN-PRO Cleaning & Disinfecting ($4,170–$56,020)
Kinderdance International ($18,100–$46,750)
Leadership Management International ($20,000–$27,500)
TSS Photography ($20,415–$74,725)

What industries are doing well

The landscape of franchise success and failure can change frequently even in a stable economy. But in the wake of COVID-19, certain industries and brands are clearly performing better than others. Keep in mind that there’s no guaranteed pandemic-proof or recession-proof investment.

Home improvement — With many businesses having employees work remotely, people have more time at home when they don’t need to commute. Businesses retailing construction materials, gardening tools, supplies, and plants, and other DIY products may be especially promising.

Case in point: home improvement franchise Ace Hardware’s 2020 second-quarter revenue was $2.28 billion, an increase of 35 percent from last year.

Home services — No matter how the economy is doing, there will always be homeowners. Home services like painting, flooring, yard maintenance, and plumbing services are considered essential. These types of franchises include Neighborly brand franchises like Molly Maid®, Mr. Appliance®, and Mr. Electric®.

Telehealth — In the current pandemic, people are seeking assistance for non-urgent healthcare needs remotely in order to avoid contact with COVID-19. But telehealth services like video consultation and remote medical billing services are also convenient at any time and this way of receiving non-urgent care could soon become the new norm.

While there aren't a lot of franchise opportunities in this industry yet, GoTelecare has a franchise business model operating in the United States and Canada. It's been around since 2012 and requires an initial investment of only $60,000.

Senior care — This year, many families have relocated their loved ones from nursing facilities to be cared for in their homes. Thus, the demand for in-home care providers has increased and that trend is predicted to continue.

Senior care franchises like Nurse Next Door and Griswold Home Care (which discounts the initial franchise fee 20 percent for veterans) are worth considering.

Delivery and courier services — With retail sales decreasing and eCommerce sales increasing, there has never been a greater demand for these types of services.

So what's the difference between delivery and courier?

Standard delivery by well-known franchises like The UPS Store and Amazon Delivery partners typically are done by a driver with a full truck making their way through a route. Courier services like Central Courier provide more specialized, on-demand delivery and can be trained for special purposes (like HIPPA certification for medical transport).

Food delivery — Be discerning with this because overall, the restaurant industry is struggling. Forty percent of U.S. restaurants were closed two months into the pandemic, a hit causing three times the job losses of any other industry.

But delivery companies have fared better than sit-downs or drive-thrus. Both Papa Johns and Domino's pizza have had sales surge during the pandemic. And if the recent success of GrubHub and DoorDash are any indication of food delivery as a whole, a food delivery franchise like Time To Eat may be a good investment.

Junk removal and hauling — In the early months of the pandemic, social media was filled with conversations about decluttering and other long-neglected household tasks. Junk removal and hauling franchises like 1-800-GOT-JUNK help homeowners and renters alike achieve goals and create needed space in their homes. Plus, running this type of business includes the benefit of team-building and community involvement.

Moving franchises like Two Men and a Truck are also worth checking out. The coronavirus has slowed real estate purchasing approval and home moving in some ways but hasn't stopped it.

Commercial cleaning services — It’s uncertain what the demand will be for commercial cleaning services if businesses stick with a remote model permanently, but for any public or private space getting foot traffic right now, sanitation is a priority and will be going forward. Franchises like Vanguard Cleaning Systems and Chem-Dry are a good bet.

This is the type of franchise you can launch right in the middle of a pandemic.

We reached out to Bactronix to hear about the new franchise location they launched recently in Suncoast, Florida. Devin Conner, director of franchise sales, said, “The growth rate of Bactronix has been incredible,” regarding this new franchise location and others. “This marks the company’s 25th operating location in less than four months.”

Other industries — There are a handful of other franchise success stories and potential pockets for growth. 7-Eleven is doing so well it bought the Speedway chain of gas stations. Fastsigns, a signage franchise has done well with increased PSAs regarding social distancing and hygiene protocols. And with an increase in online learning, virtual educational technology companies and tutoring franchises may take off.

What industries are struggling

Unfortunately, it seems that for every franchise doing well, there’s one that’s failing.

Restaurants — As mentioned, some exceptions to this are delivery-based restaurants and some drive-thrus. But recently a franchisee operating 49 IHOPS had to file for bankruptcy. Golden Corral suspended 35 of its company-owned restaurants indicating the franchised restaurants may not fare well either. Fast-casual food chains overall are not doing great.

Hospitality and travel — Hotels, car rentals, travel agencies, entertainment venues, and event centers have all been hit hard. Hertz laid off nearly one-third of its employees in April. Marriott temporarily closed 25 percent of its hotels in the spring and while occupancy has increased since then, it remains to be seen to what extent the hospitality industry can bounce back.

Local market research

Franchisors usually have a pulse on promising cities for their brands. And franchise consultants can also be a good resource. But it doesn’t hurt to do your own preliminary research.

Think about the following:

What are your community’s needs?
Is there a storefront you and your friends travel great distances to frequent?
Is there a franchise you’ve ever thought, I wish we had this?

Keep in mind that not all companies with multiple locations are franchises. Shop out locations. You may be able to land cheap commercial rent right now due to decreased demand with COVID-19 restrictions. There may also be available real estate for purchase.

Read reviews

If you've pinpointed some brands you're interested in, get a feel for each company's overall reputation online. Visit their social media pages and read comments from customers. And read reviews!

We recommend our verified reviews here on Best Company. You can research companies by industry or use the search bar to type in a specific company. Within a company's profile, you can sort through the reviews by searching for key terms such as your state's name. Try it out on the Planet Fitness profile.

Consult with a franchise expert

Franchise consultants share their knowledge with prospective franchisees. Their job is to advise and support franchisees in their goals.

Tom Scarda, CFE, CEO and Founder of The Franchise Academy and The Franchise Academy podcast shares his hard-earned knowledge with prospective franchisees. We asked him to share some of his experiences with franchise success and failure.

BC: What is your background in franchise management?

Scarda: I owned two separate franchises. One was a huge success. I sold it within five years of starting it and semi-retired at 41 years old. I purchased a second concept and failed miserably and lost almost my entire life savings. But that’s what made me an expert!

Since then, I’ve written several books including the number one bestseller, Franchise Savvy, and have been coaching people on how to avoid the mistakes I made with my second try. I also host the Franchise Academy Podcast.

BC: What factors did you prioritize in your research?

Scarda: The main factors I considered when buying a franchise was essentially the cost of entry and whether I thought it had legs to grow. I didn’t know what else to consider at the time.

BC: What was your process like in determining which franchise to pursue?

Scarda: To find my first franchise, Maui Wowi Smoothies, I used a franchise consultant. She educated me on items I would not have known since I had never owned a franchise before.

For my second franchise, Super Suppers (make and take dinner concept), I went it alone and that’s why I made mistakes. I did not do market research, and I didn’t think through the day in the life for me as the owner.

BC: How did you finance your franchise?

Scarda: I did home equity lines of credit for my businesses.

BC: What is the most challenging aspect of running a franchise?

Scarda: I think the most challenging thing about running a franchise is wearing 17 management hats at the beginning. We are taught to go to school, get a skill and apply it to a job. We are not taught to run a business.

Even though a franchise could be considered a “business with training wheels,” it’s really difficult to run. I think new franchise owners are seldom prepared for what it takes to run a business.

BC: What is the most rewarding aspect of running a franchise?

Scarda: The most rewarding aspect of being a franchise owner is taking control of my destiny. To me, a bad day in business still beats a good day in a cubicle.

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2. How to pay for a franchise

If you're asking this question, you probably don't have the extra cash to pay the costs upfront. Of course, if you already have the capital, you can skip this section. But if you're in the camp of franchisees that need to borrow, you're in good company. And you've got options, so shop around. Learn about the different types of funding that may be available to you and decide which is the best route.

Alternative business loans

These types of loans are accessible through funding companies online. They have a leg up on traditional banks in that they can approve very quickly — a matter of hours — and fund very quickly — a matter of days.

This is because alternative business loans generally involve simple applications, lenient requirements, and a variety of products that give you a good chance of finding a funding source that will work with you. Banks generally require more stringent conditions, a favorable credit history, and high capital and collateral.

The tradeoff is that they may have higher rates and less favorable terms than loans from a bank. There are hundreds of alternative business lenders and several loan types.

So what should you look for?

National Funding works with franchise owners across all business verticals and has multiple solutions for prospective franchisees to consider including equipment financing, working capital, and short-term bridge loans.

National Funding is ranked #4 out of the top-ranked business lenders based on more than 50 verified borrower reviews like the following:

Customer Review: Patrick from Liberty, Missouri

"I felt like they were customizing what they had with what I needed. It was effortless. Everybody that I talked to was super friendly and made sure that I had all my questions answered. The process was pretty easy. I did an online application. It didn't take very long. Very simple. I would recommend them to anyone. They are awesome folks to work with."

According to Justin Thompson, Chief Revenue Officer of National Funding, “Franchisees are typically looking for a lending partner that understands time is of the essence, with the use of technology over the traditional route of heavy paperwork and long wait time” and key lenders are able to meet these demands.

Thompson also says a business loan should have flexible options, such as terms, rates, and payment schedules, in order to fit the needs of the franchisee.

During the COVID-19 pandemic, Thompson has noticed that franchisees are looking for short-term, flexible products. “The long term 7–10-year bank loan isn’t suitable as they can’t be tied up for that long at the mercy of the bank,” he explains.

Our lender reviews include other companies that have high praise for franchise financing specifically.

Seek Capital:

Customer Review: Tommy from Canyon Country, California

"I had a great experience working with Seek! The process was handled smoothly and I was able to get the money I needed to order my equipment for opening my restaurant. It was hard because no lenders would help me since I don’t have any deposits since I just started my franchise. Go Seek!"

Balboa Capital:

Customer Review: Giuseppe Filippelli from Albion, New York

"They were recommended by our franchiser. Getting the loan was a fairly easy process. Everyone involved was just really nice, kind, and very helpful. They were very concerned about making sure all the information was accurate."

How can you qualify?

In regards to determining a franchisee’s eligibility for a business loan, Thompson says, “Technology makes determining eligibility quite simple. We base eligibility on attributes such as cash flow, time in business, Standard Industrial Classification (SIC), and Annual Gross Sales.”

To learn more about National Funding's business loans, The Bottom Line blog is a great resource.

Franchisor financing

Many franchise opportunities include an internal franchise financing option so you're not starting from scratch in your search for a funding source. This guided option has generally been tried and true by other franchisees for that specific franchise and may even include a discount over other funding sources.

Your chosen company's Franchise Disclosure Document (FDD) will contain the financing information, including terms and conditions, through the franchisor or partner lender.

Commercial bank loans

As mentioned, bank loans generally have more favorable terms, most notably, lower interest rates, than alternative business loans. But they are more difficult to obtain.

Bank loans often require collateral, in which you pledge equity in your home or business assets. And you may need to contribute 20 to 25 percent of the upfront costs out of pocket.

Banks favor businesses with recognizable brand names and long track records of consistent cash flow. So if you're investing in a bigger-name franchise or you need a loan to expand an already-successful franchise, a bank loan might be for you.

SBA loans

Small Business Administration (SBA) loans are financed through banks but backed by the federal government. The advantage to these loans is that the SBA sets maximum rates, typically between 7 and 9.5 percent for SBA 7(a) loans.

To qualify for an SBA loan, you need good credit and your franchise must be listed in their Franchise Directory. If your franchise is not in the directory, the franchisor must submit their FDD for the SBA to review for consideration within the Directory.

Crowdfunding

Depending on your financing needs, crowdfunding could be a feasible solution for financing a franchise. But there are important considerations surrounding crowdfunding, including limits on the amount you can raise within a 12-month time period, costs and risks of preparing a compliant disclosure document, and the need to hire an attorney with experience in franchise law and crowdfunding.

There are pros and cons of both equity crowdfunding and rewards crowdfunding. Make sure you understand this method from all angles before you pursue it.

Other methods

While they have their own set of advantages and disadvantages, there are additional financing methods to consider include the following:

Family and friends loan
Home Equity Line of Credit (HELOC)
Credit cards
Take out retirement funds (Rollover for Small Business (ROBS) or by withdrawing funds from a ROTH IRA)

Final thoughts from an employee-turned-franchise partner

If you're still considering franchise management as your next investment and career, learning from franchisees will be invaluable.

We asked Keith Novotny, a Cousins Subs employee-turned-franchisee to share some thoughts on his journey. Novotny joined the company at age 16 and has been a franchise partner for more than 17 years.

BC: How did you decide to become a franchisee?

Novotny: Because I was an employee at Cousins Subs before purchasing my first franchise, my determination came from first-hand experience working for the brand. The family-like atmosphere, encouraging leadership team, and commitment to the community struck me and guided me to my path to being a business owner. At Cousins Subs everyone is family and that philosophy encouraged and motivated me to take the leap of faith to purchase my own location and hire my talented team who have come to feel more like family.

BC: How did you finance your franchise?

Novotny: Candidly, I was fortunate to receive emotional and financial support from my parents. I essentially took a loan from them that I am paying back. I also worked with Commerce State Bank, a local bank in my community, to take out a loan.

BC: What is the most challenging aspect of running a franchise?

Novotny: Staffing is the most challenging part. It’s critical to my restaurant's success to have the right people in the right seats. More and more, it’s challenging to find young talent that wants to work and gives it their all around the clock. So, when I find the best candidates, I hire based on referrals. Word of mouth advertising has been really successful for me. When I hire from my teams’ networks, I’ve found a lot of success and fun! I mean who doesn’t want to work with their friends?

BC: What is the most rewarding aspect of running a franchise?

Novotny: Simply put, giving back to my community. I’m proud to own and operate two Cousins Subs franchises in my hometown. I’m even more proud to run successful stores that permit me to give back as much as I do. When asked by a community member to give back, I have a philosophy to not say "no." Even if I can’t help in the exact way requested, I always find a way to provide support. People like to support businesses that support them and their community they’re proud to call home.

BC: Anything else you'd like to share with our readers?

Novotny: Life is too short and it’s so important to go to work every day and enjoy what you’re doing with 100 percent satisfaction. As a franchise owner, it’s my goal to ensure each of my employees feels the same way. I also encourage future franchise owners to get outside of your four walls and network with other business owners. Not only is it fun, but you can also learn so much about how you can enhance your workplace.

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