The allure of owning a franchise, with its promise of business success and the opportunity to be your own boss, has captivated the aspirations of countless individuals worldwide. However, the road to franchise ownership can often be obstructed by a seemingly insurmountable barrier – the need for substantial capital.
In this article, we’ll talk about how to start a franchise even if you don’t have much money. If you want to be a business owner but don’t have much cash, or if you’re looking for other ways to pay for a franchise agreement and the franchise fees, we’ll give you some ideas and tips to make your dream of opening a franchise come true.
What is a franchise?
According to the International Franchise Association, franchising, a franchise system, is a business distribution method.
It involves two key players: the franchisor, responsible for establishing the brand’s trademark, business system, and trade name, and the franchisee, who, in exchange for the right to operate under the franchisor’s name and system, franchise and often an initial franchise fee.
Although the technical contract between these parties is called a “franchise,” the term “franchise” is more commonly used to describe the business operated by the franchisee.
Creating and disseminating this brand and franchise system is typically called franchising.
Check out our guide on franchise restaurants to read more about the franchising business model, its advantages and disadvantages.
What is the franchise disclosure document?
To start a franchise, the franchise disclosure document (FDD) is a legally required document that individuals looking to purchase a U.S. franchise must receive during the preliminary research and evaluation stage. This document provides crucial information that is vital for prospective franchisees who are considering a substantial financial commitment.
The Federal Trade Commission (FTC) plays a crucial role in regulating and overseeing the franchising industry in the United States. When it comes to starting a franchise, the FTC has specific regulations and guidelines in place to protect prospective franchisees and ensure transparency in franchise agreements.
What is the cost of starting a franchise restaurant?
The cost of starting a franchise business can vary significantly depending on various factors, including
- the franchise brand
- the franchise location
- size of the restaurant
- market conditions
Generally, the initial investment for a franchise restaurant can range from tens of thousands to several million dollars.
According to the SBA, the franchise fee can fluctuate depending on the specific franchise, but on average, it typically falls within the $20,000 to $50,000 range.
Apart from the initial franchise fees, you must remember the franchise royalties. According to FranchiseDirect, the royalty fee structure varies between franchise brands, but it is commonly calculated as a percentage of the franchisee’s revenues. This percentage can vary and typically falls within the range of 5% to 50%.
Finally, many franchise agreements mandate an annual expenditure on so-called marketing fees. This requirement is in place to ensure that the franchise location receives adequate promotional support to thrive in its local market.
Marketing fees usually range from 1% to 4% of the franchisee’s revenues.
While checking the real examples of well-recognized franchise examples, we can see that, to be eligible for a McDonald’s franchise, you must have at least $500,000 in personal resources that are not borrowed.
Another example could be Subway which informs on its website that the minimum financial requirements are $150,000 net worth with $100,000 liquid assets (cash-on-hand) per location.
What’s important, in some cases, additional criteria or higher standards may be required, depending on the specific territory or franchise locations.
When looking at the KFC website, we can see that there is a $45,000 startup fee and the royalty fee is between 4.0% – 5.0%.
To sum up, it’s crucial to thoroughly review the franchisor’s disclosure documents (Franchise Disclosure Document or FDD) to understand the estimated initial investment required for a specific franchise restaurant.
How to open a franchise with no money?
How to start a franchise with no money? How to join the franchise industry? Below we described 7 ways to open a franchise with no money.
1. Choose a supportive franchisor
Selecting a supportive franchisor is a crucial factor when starting a franchise business. A franchisor plays a pivotal role in the success of franchise owners, and their support can significantly impact the growth and profitability of your franchise.
Here’s why choosing a supportive franchisor is essential:
- Guidance and training: Supportive franchisors provide in-depth training and mentorship to franchise owners, empowering them with the expertise to navigate the business model effectively, making it particularly beneficial for newcomers.
- Strategic site selection: Franchisors leverage their market knowledge to assist franchisees in selecting prime business locations, maximizing customer traffic and revenue potential.
- Flexible fee structures: Some franchisors offer adaptable franchisee fee arrangements, aiding franchise owners in managing their finances efficiently, especially when launching with limited funds.
- Sustained assistance: Supportive franchisors continue to offer guidance post-launch, encompassing marketing aid, operational counsel, and adaptation to evolving market dynamics.
- Not all franchises are alike: It’s important to note that not all franchises offer the same level of support. Therefore, thorough research and due diligence are essential when evaluating franchise opportunities.
In conclusion, choosing a franchisor that prioritizes the success and well-being of franchise owners is a key strategy for starting a franchise. Their guidance, training, financial flexibility, and ongoing support can greatly enhance your chances of building a thriving franchise business.
2. Apply for a traditional bank loan
Applying for a traditional bank loan to start a franchise can be a viable financing option, provided you meet the bank’s lending criteria.
Typically, you’ll need a well-structured business plan outlining your franchise concept, market research, and financial projections to demonstrate the feasibility of your venture. Banks will assess your creditworthiness, so maintaining a good credit score is crucial.
Additionally, be prepared to provide collateral and a personal guarantee, as many banks require these to secure the loan. Once approved, a bank loan can provide the capital needed to cover franchise fees, initial setup costs, and working capital for a successful franchise launch.
3. Apply for a small business administration (SBA) loan
Another option is to apply for a small business administration (SBA) loan to kickstart your franchise.
SBA loans are attractive because they offer favorable terms, competitive interest rates, and longer repayment periods. This financial assistance can be instrumental in covering franchise fees, initial investments, and working capital, ultimately setting your franchise on a path to success.
You can apply for:
- the SBA 7(a), the primary means through which the Small Business Administration (SBA) offers financial support to small businesses. More information on SBA
- the SBA CDA/504 loans, a long-term, fixed-rate financing of up to $5 million for major fixed assets. More information on SBA
4. Consider a home equity loan
Using a home equity loan to initiate a franchise can be a practical financing avenue, especially if your home has considerable equity. This approach involves leveraging the value of your property to secure funding for your franchise endeavor.
However, it’s essential to exercise prudence as home equity loans entail the risk of home foreclosure in case of payment defaults.
Before proceeding, thoroughly assess the loan terms, interest rates, and your financial capacity to ensure that the potential benefits of franchise ownership outweigh the potential risks to your home.
You can also consider a Home Equity Line of Credit (HELOC), commonly known as a home-based line of credit, which operates by utilizing the equity in your home to establish a flexible credit line.
To qualify for a HELOC, your lender evaluates your home’s market value and subtracts your outstanding mortgage balance.
For instance, if your home is appraised at $300,000 and your remaining mortgage debt is $150,000, your available equity amounts to $150,000.
Based on your home’s equity, the lender may extend a line of credit with a predefined limit. If you qualify for an 80% HELOC, you could access up to $120,000 (80% of $150,000).
5. Use your personal retirement funds
Another option is using your personal retirement funds through Rollovers for Business Startups (ROBS).
To be eligible for a ROBS plan, aspiring entrepreneurs need to have one of these retirement accounts:
- a 401(k) – more information on the IRS
- a 403(b) – more information on the IRS
- an IRA – more information on the IRS
Collaboration with a ROBS provider is essential to access these funds and may be a nominal one-time fee associated with their services.
It’s essential to understand the tax implications, regulations, and potential risks associated with this approach. Consulting with financial and legal professionals is advisable when considering a ROBS plan.
6. Look for a private investor
An excellent alternative to consider involves seeking private investors. Business angels and venture capital firms frequently invest in restaurants by acquiring a stake at a pre-established valuation.
A business angel investor could also be your friend or a family member.
7. Contact your nearby restaurant association
Last but not least, you can contact the nearby restaurant association. Restaurant associations typically focus more on smaller dining establishments, but they certainly possess valuable insights and expertise in franchising.
- The National Restaurant Association offers valuable resources and guidance to entrepreneurs interested in starting a franchise within the restaurant sector. With its extensive knowledge and expertise, the association provides insights into franchising best practices, regulatory compliance, and industry trends, making it a go-to resource for aspiring franchisees in the restaurant business.
- State Restaurant Associations may offer specialized programs or advantages to assist new restaurant proprietors and individuals aspiring to become franchisors.
What is required to start a franchise?
Below are the steps to open a franchise with no money.
Step 1. Make a research
Begin by researching low-cost franchise opportunities or those with flexible financing options.
Look for franchisors that offer reduced initial fees or alternative funding arrangements.
Step 2. Write a business plan
As a prospective franchisee, develop a detailed business plan outlining your franchise concept, target market, and financial projections.
A well-structured plan can help you attract potential investors or secure loans.
Check out our helpful guide on How to Write a Restaurant Business Plan.
Step 3. Find capital
Explore various funding sources, such as personal savings, loans from family and friends, or small business grants and bank loans.
Look for restaurant investors interested in partnering with you or considering crowdfunding options.
Above, we described 7 ways of starting a franchise business with no money.
You can also check out our article on 18 Ways How to Open a Restaurant With No Money.
Step 4. Obtain licenses and permits
Ensure you understand and obtain all the necessary licenses and permits required to operate your specific franchise.
Licensing and permit regulations differ from one state to another. It’s important to note that not every town in the United States permits the establishment of new fast food restaurants, for example.
Ensuring proper legal preparation is essential when establishing a thriving franchise business. This process not only safeguards against potential future legal conflicts but also secures your investment, instilling confidence as you embark on your journey in franchising.
Step 5. Hire employees
When launching a franchise, hiring the right Front of House (FOH) and Back of House (BOH) staff, along with competent managers, is crucial to ensure the smooth operation of your business.
FOH staff, such as servers and hosts, are often responsible for creating a positive customer experience.
In contrast, BOH staff, including chefs and kitchen personnel, are essential for maintaining food quality and preparation standards.
Some franchisors offer assistance in recruitment and training to help franchisees assemble a skilled and well-coordinated team, ensuring that the franchise meets brand standards and delivers a consistent and enjoyable customer experience.
Step 6. Use restaurant technology
Utilize restaurant technology solutions that help to simplify business operations and ensure business growth.
For example, consider implementing an online ordering system allowing customers to place orders directly from your website. Utilizing an accessible online ordering solution will expand your reach to a broader audience of potential customers.
Here you can check how to set up an online ordering system.
Another restaurant solution is table ordering. You should generate QR codes and place them on tables to employ this restaurant technology. This allows clients to place orders and complete payments effortlessly from their mobile devices while seated at their tables.
Step 7. Create a marketing plan
Develop a restaurant marketing plan that prioritizes low-cost or free marketing channels, such as social media, local advertising, and community outreach.
Leverage digital marketing tools to target a specific audience without significant upfront costs.
You can also create a loyalty program for your customers. It entices customers to return because they receive perks like discounts while enhancing the restaurant’s understanding of its clientele for more effective promotions.
Furthermore, it fosters goodwill among patrons, leading to positive word-of-mouth recommendations.
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Step 8. Prepare a launch plan
Plan a well-organized and cost-effective event to generate buzz and attract initial customers.
Use word-of-mouth marketing and local partnerships to promote your grand opening without a substantial marketing budget.
Check out our article on 14 Best Restaurant Grand Opening Ideas.
What are some popular franchise brands?
Examples of popular franchise companies with an established brand include:
- McDonald’s: One of the world’s most recognized fast-food chains, known for its hamburgers, fries, and various menu items.
- Subway: A well-known sandwich franchise with a wide range of customizable sub sandwiches.
- Starbucks: Famous for its coffee, tea, and café experience, Starbucks has a global presence.
- Dunkin’ (formerly Dunkin’ Donuts): Renowned for its coffee, donuts, and breakfast items, Dunkin’ is a popular franchise in the United States and beyond.
- Pizza Hut: A leading pizza restaurant chain with a diverse menu of pizzas and other Italian-inspired dishes.
- KFC (Kentucky Fried Chicken): KFC is a global fast-food brand known for its fried chicken and Southern-inspired menu items.
- Taco Bell: A fast-food chain specializing in Tex-Mex cuisine, offering tacos, burritos, and other Mexican-inspired dishes.
Key Takeaways
- When considering a franchise opportunity, choose a franchisor known for supporting franchise owners. This can include flexible financing options and guidance for newcomers to franchise operations.
- Traditional bank loans can be a viable source of financing for your franchise business. Be prepared to demonstrate your creditworthiness and present a solid business plan to secure the loan.
- Consider exploring home equity loans or using your retirement savings through ROBS as potential financing options for your franchise. Be cautious about the risks of using assets like your home or retirement funds as collateral.
- Consider SBA loans, which offer favorable terms, and explore private investors as potential sources of funds for your franchise. Ensure that any financial agreements align with your franchise agreement and ownership objectives, allowing you to proceed with franchise sales and operations.
- Consider private investors to secure capital for your franchise business, ensuring that any financial agreements align with franchise company requirements and your audited financial statements.
- Contact your nearby restaurant association for valuable networking opportunities and insights relevant to franchise operations, especially if your franchise is affiliated with a parent company.
Frequently Asked Questions (FAQ)
How much money do you need to start a franchise?
The startup expenses for a franchise restaurant can fluctuate considerably, contingent on several elements like the franchise brand, restaurant size, location, and local market dynamics.
Typically, the initial investment for a franchise restaurant spans from tens of thousands to potentially several million dollars.
Can you start a franchise with no money?
Starting a franchise with absolutely no money is highly challenging. Franchises typically require significant capital for various expenses, such as franchise fees, initial investments in equipment and inventory, lease or real estate costs, and working capital to sustain the business until it becomes profitable.
However, there are potential approaches to starting a franchise with no money:
- Seek a supportive franchisor: Find franchisors with flexible financing options.
- Apply for bank loans: Present a solid business plan to secure traditional loans.
- Consider SBA loans: Explore SBA loans for small businesses, including franchises.
- Evaluate Home Equity Loans: Use home equity if available, but be cautious.
- Utilize ROBS: Access retirement funds through Rollovers for Business Startups.
- Seek private investors: Attract investors willing to fund your franchise.
- Contact local restaurant association for support
How profitable is owning a franchise?
According to Sculpture Hospitality, the potential earnings can vary significantly based on franchise type, location, investment level, and the franchisee’s managerial proficiency.
On average, franchisees typically realize a profit margin ranging from 4% to 12% of their gross revenue.
How much does it cost to open a franchise?
While entry costs can span from under $10,000 to over $5 million, most franchises typically require an investment ranging from approximately $50,000 to $200,000 to commence operations.
