If you’re planning to buy a business, you’ve probably
debated between buying an existing business or a new franchise.
Some of the advantages of buying an existing good
independent business could include a proven track record of sales and profits,
a well-know name and location, a strong mix of products and services, a group
of knowledgeable employees and a good customer base.
There are benefits with buying a franchise too. Buyers are
able to purchase an established business plan with step by step guidelines.
Plus, most franchisors offer training and operational support due to their
incentive of the royalty fee that they will earn from the franchisee. Usually,
the franchisee will also have access to other owners for help, ideas and moral
support.
When considering a franchise, buyers routinely assume that
they never fail, which couldn’t be farther from the truth—every business
venture is risky. To increase your chance of being successful When conducting your due diligence process,
find out the answers to the following four questions:
What is the total cost of ownership? Franchise buyers need to understand the
immediate out of pocket expenses they will incur upon purchase, as well as any
other ongoing fees. All franchises are
not created equally. Some will structure
a purchase with less start-up fees or allow you to make incremental payments;
others may provide incentives for multiple territories, growth and sales
volume. Along with the up-front franchise fee, you will likely have to pay the
franchisor a royalty based on a percentage of your sales. You may also be
required to lease equipment, purchase supplies or services directly from the
franchisor. Depending on location
requirements, the additional expense to make leasehold improvements and outfit
your new business with furniture and fixtures specifically required by the
franchisor may fall in your lap. Finally, in some cases special advertising
fees are levied against sales to pay for franchisor marketing costs.
Understanding all the upfront and ongoing costs of ownership
enables new owners to compare their forecasted return on investment with their
expectations.
What is the turnover rate?
Unpleasant as it may seem, buyers need to ask the franchisor they are
considering what percentage of their franchisees fail each year and how many
close within the first two years.
Do not be surprised to find some failures, even the best
franchisors’ experience some bumps in the road. Learn about the frequency of
franchisee failures in your industry, plus ask questions about reasons why they
failed and look for common traits. For example, you may discover a number of
failures are caused by poor management skills, reluctance of franchisees to
follow the franchisors script, inadequate promotions and poor location choices.
Most importantly compare them to your situation.
Understanding the turnover rate of franchise ownership will
help paint a picture of attractiveness vs. buying an existing business in the
same industry or shopping for a different franchisor. This will go a long way to making an informed
decision.
Will my territory be protected? It’s critical to explore the level of
regional protection you will have. For example, does the franchisor guarantee
they will not sell other franchises in your area, and for a certain time
period?
Similarly, you will want to uncover what kind of
empire-building opportunities you will have. Some of the more successful
franchise owners have multiple outlets in the same area and are able to utilize
economies of scale. You will need to find out if you have first right of refusal
for new franchises, for which market area and under what parameters.
By uncovering the opportunities or limitations to growth you
will ensure there are no disappointing surprises down the road.
What happens when you want to leave? As with purchasing any business, a buyer not
only needs to have a plan going into the business, they should have an exit
strategy as well. As a franchise buyer, you need to identify what kinds of
restrictions you’ll will be under when you want to get out.
Will you be able to sell it to anyone or only back to the
franchisor? You should also research the comparable sales prices of franchises
that have recently sold. And, you must
know if there is any transfer fees associated with your re-sale. Many
franchisors will charge a one-time transfer fee to buyers of existing
franchises, and the fees can be extensive.
Although it’s difficult to make blanket statements about
which franchise models are better than others, buyers need to understand where
their franchisor’s interests lay before they purchase. The best thing you can do is thoroughly read
and digest the disclosure materials and franchise agreement; probe and question
the areas that are unclear; and visit and speak directly with the franchisor to
be able to make an informed purchase decision. Remember, franchisors complete a
thorough investigation of you before they approve you as a franchisee, it’s in
your best interest to do the same with them.
Bill Sivell is a salesperson with VR Windsor Inc., which
sells businesses to buyers across Canada and around the world. His 14-year
career includes diverse senior management positions in marketing, advertising,
sales management and operations management. He blogs about selling businesses
at Maxbizvalue.blogspot.ca.
