How to buy a franchise: a buyer's process
Short answer
To buy a franchise: shortlist brands that fit your skills and budget, get each franchisor's Franchise Disclosure Document (FDD) and read it fully, especially fees (Items 5 to 7), litigation (Item 3), financial performance (Item 19) and outlet turnover (Item 20). Call current and former franchisees, check the territory, have a franchise attorney review the agreement, line up financing, and only then sign. Federal rules require the franchisor to give you the FDD at least 14 calendar days before you sign or pay.
Franchising sells a system: brand, playbook, supply chain and support, in exchange for fees and rules. Your job is to find out whether that system makes money for people like you, in places like yours.
The process
- Decide what you want to do every day, and your budget (cash plus financing).
- Shortlist a few brands in categories that fit. Skip "best franchise" lists; they rarely reflect your market or skills.
- Get the FDD and read all 23 items. It must arrive at least 14 calendar days before you sign or pay.
- Call franchisees: current ones and those who left (Item 20 lists them).
- Model your unit: initial investment (Item 7), ongoing fees (Item 6), and realistic sales; use Item 19 with care.
- Check territory (Item 12) and the site approval process.
- Line up financing; lenders check the SBA Franchise Directory.
- Have a franchise attorney review the FDD and agreement.
- Sign, train, open, or buy a resale instead. See franchise resales.
FDD items to read twice
| Item | Covers | Why it matters |
|---|---|---|
| 3 | Litigation | Disputes with franchisees and regulators |
| 5, 6 | Initial and other fees | Royalties, ad fund, tech fees, transfer fee |
| 7 | Estimated initial investment | Your total cash need |
| 11 | Franchisor assistance | What support you actually get |
| 12 | Territory | Protection from nearby units |
| 17 | Renewal, termination, transfer | Your exit and resale rights |
| 19 | Financial performance representations | What units earn, if disclosed |
| 20 | Outlets and franchisee information | Openings, closings, transfers; contact list |
| 21 | Financial statements | Franchisor's financial health |
franchise due diligence checklist.
Should I buy a franchise or an independent business?
Buy a franchise if you value a proven system, brand recognition and support enough to pay ongoing royalties and follow the franchisor's rules. Buy an independent business if you want control over products, prices, suppliers and branding, and you're comfortable without a playbook. A franchise doesn't guarantee success; check the specific brand's unit economics and franchisee turnover in the FDD, and talk to franchisees.
The franchise question comes down to a trade: you pay fees and accept rules in exchange for a system. The trade is good when the system is strong and you value what it provides.
Side by side
| Franchise | Independent | |
|---|---|---|
| Brand | Established, shared | Yours, local |
| Playbook and training | Provided | You build or inherit it |
| Ongoing fees | Royalties, ad fund, tech fees | None |
| Control | Limited: menus, suppliers, prices, design | Full |
| Territory | Defined by agreement | Open competition |
| Selling later | Franchisor approval, transfer fee | Your decision |
| Financing | Lenders know established brands | Based on your business's history |
Questions to decide
- Do you want to follow a system, or build your own way of doing things?
- Do franchisees of this brand say they'd buy again?
- Do unit economics work after all fees, at realistic sales?
- Is there a resale available, so you can see a unit's real numbers? See franchise resales.
Timeline: from first call to opening
- Research and shortlist brands that fit your skills, budget and market.
- Discovery: franchisor calls, application, financial qualification.
- FDD review (at least 14 calendar days before signing or paying), with a franchise attorney.
- Franchisee calls and your own unit model.
- Financing: lender pre-approval; check the brand's SBA eligibility.
- Sign the franchise agreement; for a new unit, site selection and lease; for a resale, the transfer process.
- Training and, for new units, build-out and opening.
New units often take many months from signing to opening, during which you're paying rent, loans and your own living costs before any revenue. A resale skips that ramp, which is one reason buyers consider them.
How to buy a franchise with no money: what's realistic
Buying a franchise with no money is rarely possible. Franchisors usually set minimum liquid capital and net worth requirements for new franchisees, and SBA lenders require equity (at least 10% for an initial acquisition of an existing unit). Some franchisors offer financing, fee discounts or incentives for certain groups, such as veterans, which reduce the cash needed, and some buyers use retirement funds through a ROBS structure.
Check the FDD (Items 5, 7 and 10) for fees, total investment and any franchisor financing.
Franchisors want owners who can survive the ramp-up. That's why most ask for meaningful cash. The no-money route mostly means using someone else's money, with all the obligations that brings.
Where the money for a franchise comes from
| Source | Where to check | Watch for |
|---|---|---|
| Your cash | Franchisor's liquidity requirement | Keep a reserve for ramp-up |
| SBA loan | SBA Franchise Directory; your lender | Equity minimums; personal guarantee |
| Franchisor financing | FDD Item 10 | Rates, security, default terms |
| Fee discounts / incentives | Franchisor; FDD Item 5 | Conditions attached |
| Retirement funds (ROBS) | Specialist adviser | IRS compliance concerns, retirement risk |
| Investors / partners | Your network | Ownership, SBA minority investor limits |
The honest math
For an existing unit financed with SBA, the floor is the same as any business: 10% of the project for an initial acquisition, at least half from unlimited sources. See buying with no money down. For new units, the franchisor's own requirements usually decide. Either way, budget a reserve: new units take time to break even, and even resales can dip after a change of owner.
Worked example: reading Item 19 without fooling yourself
Illustrative example, not any franchisor's disclosures
An FDD's Item 19 shows average gross sales of $1,050,000 for units open at least two years. The footnotes say the average covers 180 of the system's 260 units, and the median is $910,000. Royalty is 6% and the ad fund 2%. Franchisees you call say food and labor run about 60% of sales and rent about 9%. At the median: $910,000 × (1 − 0.06 − 0.02 − 0.60 − 0.09) = $910,000 × 0.23 = $209,300 before other operating costs, debt and your pay. At the average, $241,500. Now subtract other costs franchisees mention (insurance, utilities, repairs, technology) of about $90,000, and the median unit leaves about $119,300 before debt service. Whether that supports the investment depends on what you'd borrow. The point: use the median, read which units were included, and get the cost side from franchisees, not from the sales figure.
Questions to ask franchisees (current and former)
- How long did it take to reach the sales level you're at now?
- What did your total investment come to, compared with Item 7?
- What are your largest costs as a share of sales?
- What support do you actually get, and what do you pay extra for?
- Has the franchisor changed fees, suppliers or requirements since you signed?
- Would you buy again? If you left, why?
Before you sign the franchise agreement
The FTC Franchise Rule requires the franchisor to give you the FDD at least 14 calendar days before you sign a binding agreement or pay any money. Use those two weeks for work, not for waiting. A short pre-signing list:
- Have a franchise attorney read the agreement against the FDD, in particular term, renewal conditions, transfer fees, territory and the default and termination sections.
- Ask an accountant to build a monthly cash flow from your own assumptions, not the franchisor's, including royalty and marketing fund contributions on gross sales.
- Confirm the real estate and lease terms before the franchise agreement locks in an opening deadline you may not be able to meet.
- Get the lender's term sheet in writing and check whether the brand is eligible for SBA financing on the SBA Franchise Directory.
- Write down every promise a salesperson made that is not in the FDD. If it matters to you, ask for it in writing; anything outside the document generally carries little weight.
Frequently asked questions
What is an FDD?
The Franchise Disclosure Document, required by the FTC Franchise Rule (16 CFR Part 436) in most franchise sales. It has 23 items covering the franchisor, fees, obligations, litigation, financial performance, outlets and financial statements.
How long do I have to review the FDD?
The franchisor must provide it at least 14 calendar days before you sign a binding agreement or pay anything, under the FTC Franchise Rule. Some states add their own requirements.
Should I buy a new franchise or a resale?
A resale has a track record you can verify; a new unit lets you choose location but carries ramp-up risk. See buying a franchise resale.
Which franchise should I buy?
We don't rank brands. The right one fits your skills, budget and market, has franchisees who'd buy again, and has numbers that work for your financing.
Are franchises safer than independent businesses?
Not automatically. A strong system with good unit economics can reduce risk; a weak system adds fees and rules without the support to justify them. Look at FDD Item 20 closures and transfers.
What are the ongoing costs of a franchise?
Royalties, advertising fund contributions, technology fees and other charges listed in FDD Item 6, plus required purchases from approved suppliers.
Sources
- FTC Franchise Rule, 16 CFR Part 436 (eCFR)
- SBA: Franchise Directory
- SBA: Buy an existing business or franchise
- SBA SOP 50 10 8.1, Appendix 15 (equity)
- IRS: Rollovers as Business Start-Ups Compliance Project
Related guides
General information, not legal, tax, financial or investment advice. Rules and lender practices change; check the linked sources and talk to your attorney, CPA and lender about your deal. Examples with named numbers are illustrations, not real businesses. OKtoBuy's Deal Check does not value businesses or give price opinions.