Buy a franchise successfully
Congratulations, you’ve decided to buy a franchise.
Now you need to put your nose to the grindstone and do some homework in order to choose the right one. More time in preparation can avert any number of franchise disasters. Here are some tips on what to do before you sign anything.
Franchise Disclosure Document
Your starting point in this process, particularly if you’re new to this game, is to contact an experienced business broker. He or she can advise on how to analyze potential opportunities and help you make your decision. The franchise’s information is contained in its offering circulars. These documents, called Franchise Disclosure Document or FDD and used to be called the Uniform Franchise Offering Circulars (UFOCs), can be hundreds of pages and filled with legalese. The offering circular contains the company’s history and its management team, financial statements, its processes for settling disputes, and the risks associated with the franchise. They also include a great deal of helpful data, such as annual revenues per location, growth projections, and the expectations of franchisees. The FDD’s also provide the names of former franchise owners.
Make sure that you carefully examine the three-year percentage figures on franchise turnover. If this figure is in double-digits, it’s a red flag. In addition, look at the litigation section—if its voluminous that’s another sign of a troubled franchise system.
Now that you’ve passed those hurdles, take a look at the prices. In addition to the initial entry fee and royalties (the portion to be paid to the franchiser), see what you’ll contribute to shared services, like advertising, software rental, equipment and maintenance, and other services. You also will want to find out what’s required for initial inventory and store-construction expenses, as well as the amount of a cash reserves needed. You need to think about all of those costs when you weigh your decision.
One important factor is the size of the franchise system. If a systems has less than 50 units, this may indicate some issues with their business model, which could require more business and operational skills from franchisees than would be required in a larger franchise system.
Also study the territory and customer base being offered and determine whether the franchise offers area exclusivity. If it doesn’t, see how many how many identical outlets are already in the area. You should also see the business in operation by visiting several sites. Try to get a feel for what goes on, customers, staff, the size of transactions, and other business processes.
Make Use of a Franchise Expert
Again, if you don’t have a firm grasp and experience with the franchising process, seek the advice of a knowledgeable business broker. A broker will be able to instruct, for example on negotiating with a young franchise, where you may be able to seek more favorable terms. A broker will have many more thoughts and strategies to help you secure the franchise you want.
For immediate assistance with buying a franchise or with your franchise questions, email Andrew Rogerson or call us at (916) 570-2674.