When you want to run your own business but want the support of a known brand, buying a franchise may seem like a smart way to get started. Perhaps you might be an existing small business owner who wants to expand your company’s footprint. New research shows that the city you live in could give you a leg up when it comes to opening a franchise.
LendingTree researchers analyzed data from the Census Bureau’s Survey of Entrepreneurs to find which metro areas in the U.S. are home to the most franchised businesses. As a whole, 5.4% of all businesses operate entirely or partially as a franchise. But some cities exceed the average, while others dip as low 3.4%. Below, we’ll take a look at where franchises are the most popular.
Should you jump into franchising?
Key findings
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- Lone Star State dominates the top 5. San Antonio has the highest percentage of franchised businesses — nearly 10%. Franchises in San Antonio tend to be relatively small, with average payrolls about 13% larger than the average non-franchised business. Texas is a hub for franchised businesses with Dallas and Houston also ranking in the top four cities, each with roughly 8% of businesses operating as franchises. Austin also scored above average with 6.3% of firms operating as franchises coming in at No. 13 on the list.
- Coastal cities tend to have the lowest franchise rates. In Miami, just 3.4% of businesses operate as a franchise, the lowest on our list. Several of these coastal cities are also larger cities: in San Francisco, 3.7% of firms operate as a franchise, the same figure as New York. Boston, Los Angeles, Tampa and Seattle all have franchise rates below 4.5%.
- Franchises can be large employers. There are other ways of measuring how important franchises are to a local economy. For example, in Las Vegas, there may not be as many franchises as the top-ranking cities on our list, but the few operating in town are large employers. Just over 20% of Las Vegas workers are employed by a franchise even though franchises make up just 6.3% of all firms here. In Louisville, one in five paid employees works for a franchise. On average, a franchised business in Louisville has a payroll nearly 3.7 times that of a non-franchised business.
- In the vast majority of metro areas, franchised businesses tend to be larger by payroll than non-franchised companies. In just 13 metro areas, the average non-franchised business has a larger payroll than the average franchised business.
Metros with the highest franchise rate
1. San Antonio, Texas – 9.5%
At the top of our ranking, San Antonio is home to 1,800 businesses that operate fully or partially as a franchise out of 18,943 total businesses. The 9.5% franchise rate puts San Antonio nearly two percentage points ahead of Nashville, our No. 2 metro. San Antonio also boasts a fairly high number of employees who work for franchised businesses — 14.9% of total reporting employees in the city.
San Antonio is a desirable location for businesses, as the area has low property taxes and many financial incentives. However, franchised businesses in San Antonio are subject to a statewide franchise tax. This tax is imposed on each taxable entity that is doing business in Texas or organized in the state, regardless of business structure. Not every state has a franchise tax — Texas is one of 16 that does.
2. Nashville, Tennessee – 8.1%
Nashville’s 1,514 franchised businesses — or 8.1% of all firms — landed the metro area in our second-place spot. Although many franchises are located in the area, just 11.1% of Nashville’s employees work at these businesses. Average payroll for franchised businesses in Nashville is lower than payroll at non-franchised business — $935,750 compared to $1,289,805.
Nashville saw 10% population growth between 2010 and 2018 for a total of 669,00 people living in the metro area. The urban density in Nashville makes the area fertile ground for franchises, which tend to thrive in populated areas. As the city grows, franchised businesses could fill a need for services like dry cleaning and senior assistance.
3. Dallas, Texas – 8.0%
Slightly behind Nashville, Dallas has 5,645 franchises in the area out of 70,462 total reporting firms. Dallas is among the metro areas with the highest number of reporting companies in our study. Franchised businesses are also large employers in Dallas, as 201,548 people are employed by a franchise, or 14.6% of all employees in the metro area.
The Dallas metro area (including nearby Fort Worth and Arlington) gained more people last year than any other metro in the country, adding 131,767 residents between 2017 and 2018. North Texas is also home to the headquarters of several major franchises, including Sally Beauty Holdings, Cicis Pizza and Palm Beach Tan. The Dallas area’s fastest growing franchise is window treatment company Bloomin’ Blinds, which grew more than 600% between 2015 and 2018, from eight locations to 61, according to research from the Dallas Business Journal.
Should you jump into franchising?
In addition to the city in which you live, there are several other factors to consider when determining whether franchising is right for you.
Franchising is a way to own your business with the support of a larger company, but there may be significant costs to get started, royalties and other payments once you’re up and running and restrictions over what types of products and services you may offer. Fast food enterprises are the most popular franchises, but there are more than 800,000 types of franchises available for prospective business owners to buy.
If you’re looking to purchase a franchise, try to find a business in an industry that fits your personal skills and existing knowledge. The franchisor would likely provide a business plan and guidance to help you run the operation, but it would be ideal if you could bring your own expertise to the table as well. Some franchises will even require that franchisees have prior experience.
Most companies also require a down payment of non-borrowed funds from new franchisees, so you may want to wait to buy until you have liquid assets to offer up front. The remaining costs of opening a franchise, which are similar to the cost of starting any new business — equipment and fixtures, for instance — could be financed through business loans.
In particular, franchise loans are designed to help franchisees fund a new business or cover ongoing operating costs. Traditional banks and lenders issue loans to franchise owners, and some franchise companies also have their own financing programs and can offer loans to franchisees as well.
Whether you’re located in one of our top-ranking cities or not, you could expect to make a $50,000 to $200,000 investment when opening a franchise, although startup costs could end up running into the millions.
For entrepreneurs who want to expand their operations, franchising can be a way to grow the business. Franchisees could invest in your company and operate additional storefronts. However, you would need to decide how hands-on you want to be and how much capital and resources you can devote to new locations.
Methodology
In order to rank the places with the most franchises, we used data from the 2016 Survey of Entrepreneurs. Specifically, we looked at the number of businesses in an area and compared it to the number of businesses operating as a franchise in that area. That gave us the franchise rate or the percent of businesses in an area which operated as a franchise. We also compared the average payroll of franchised businesses to non-franchised businesses as well as the number of employees.
This piece originally appeared on LendingTree.
