TIPS ON KEEPING YOUR EYES WIDE OPEN WHEN BUYING A FRANCHISE
It still surprises me how many people get “tunnel vision” when looking to buy a franchise.
By tunnel vision, I mean that they get fixated on one particular franchise opportunity. They enquire and then go through the steps of buying a franchise without considering any other opportunities or asking the right questions and demanding the right answers.
Many people move forward without stopping to ask questions like:
• “How do the competitors stack up?”
• “Why am I choosing this opportunity over that opportunity?”
• “What else could my money buy me?”
• “How does the industry outlook compare from one franchise to another?”
• “What does my day to day role look like in this business versus that business?”
• “How does the team of people (head office and other franchisees) in this franchise compare to another?”
You would rarely buy the first car you see or test drive, or a home without first looking at different options. We put considerable time and thought into comparing different holiday destinations before making a choice for a two-week vacation. Even buying a phone, a computer or a television has us researching the different features, price points and brands.
The decision to purchase a franchise is a much bigger decision. Some people have even said it’s a bigger decision than choosing a husband or wife! Buying a franchise is not only a financial decision – it shapes your day to day life for an average of seven years, because that’s the industry average for time franchisees spend in a network.
We have all experienced food envy. It’s not a great feeling. Imagine, six months after opening your franchise business, seeing a franchisee from a different network living a great life – which you could have had! There are some amazing franchise systems out there and I have seen how franchising can enrich families’ lives and shape amazing futures for people.
So how do you weigh up the options and assess the relative merits of different industries, brands and networks?
Here are some tips on evaluating each opportunity and choosing what is right for you and your family at this stage of your life:
MONEY QUESTIONS:
The Price
It seems a no-brainer but knowing how much you have to spend, including how much you can borrow, hopefully against the fixtures and fittings of the business or potentially against your other assets such as your home, is vital. Find out if the franchisor is accredited with a bank and can assist you with getting finance. This can be helpful not just in raising the necessary capital, but their accreditation with their bank may also add to the security of their offer.
Financial Due Diligence
Have you been provided average historical figures as a guide to performance? If not, ask for them. You want to see real financial performance data from both franchise and company owned stores across the network so you can evaluate the opportunity.
Operating Capital
Talk to other franchisees and find out what the ramp up period could be and how much money they needed to tide them over till the business started to be profitable.
Understand Cash Flow
Again, talk to other franchisees, not just in terms of operating capital. Are there seasonal fluctuations, or do the terms of trade with suppliers put strain on cash flow, and how can you prepare for that?
ROI (return on investment)
Ask the franchisor about the return on investment, requesting the average ROI across the group. If that information is not available talk to as many franchisees as possible asking how long it has taken them to make back their original investment plus their salary.
Is This Feasible?
Does the size of the investment match what you can genuinely afford or are you stretching yourself to buy this business? What will you do if it takes longer to become profitable or you have insufficient operating capital? What do you stand to lose? Allow some leeway in your calculations for unforeseen circumstances.
Motivation
Are you just looking for as much money as possible or are you looking for something you will enjoy and can be passionate about as well? It’s easy if it’s only money that motivates you. Otherwise, read on!
PASSION AND COMMITMENT QUESTIONS:
Passion and Interest
What makes you happy? If you’re going to jump out of bed and head into your franchise business for another seven years, you had better find something that you can remain enthused about for that long.
Find a business that fits who you want to be
This isn’t just about making money. Would you be proud to be an ambassador for this brand, and to talk about your new business with your friends and family?
Finding a Fit
Are the other people in the network people you would be proud and confident to have as colleagues and does the screening and selection process ensure you and they are a good brand fit? Dedication and enjoyment in your work are important to most people, so you need to speak to each and every franchisee. If possible request a day in-store/ in the business, or a week if you can, to make sure this is the job for you.
PRACTICAL CONSIDERATIONS:
Trading Times
Are you a night owl or a morning person? There is no point buying a coffee shop if you operate best later in the day. Do you want to work seven days a week and nights or do you want a 9-5, Monday to Friday job? Do you need a job that can fit in around picking up kids from school? Considering each of these carefully will help you determine whether you should be looking at a food business, a mall-based business, a B2B, or a mobile or home-based business.
Family and Support
This is paramount and it’s tied to the previous consideration. Being a successful and profitable franchisee depends on working the business yourself. Yes, you might have staff and if it’s open 60 hours or more a week, you might even have a manager at times, but you need to be there if It’s going to work. So be realistic about how much of your time and effort your business will require and make sure your family is ok with the sacrifices this will mean for all of you. Running your own business can provide future security for your family but you’ll need their support and understanding to pull it off.
Location
If it’s a bricks and mortar business is it close to your home? Or if it’s a mobile business is it in the territory where you live? It’s always better to stay local as you know your area and are a member of the community already, so will be more effective at marketing and developing your business. Not to mention – the less travel the better!
DUE DILIGENCE
Due diligence is a lawyer term for doing your research! Under the Franchising Code of Conduct every franchisor must provide potential franchisees with a Disclosure Document. As a part of this, the franchisor is obliged to give you a list of all the existing franchisees in the network and those that have left. Go and see them (all of them if possible!) and ask all the questions noted above.
Spend time with the franchise head office staff and the directors if possible. Do they seem genuine? Can you see yourself working with them?
Get Legal Advice
Get advice from professional specialist franchise lawyers who will review the Franchise Agreement and Disclosure Document. Get a fixed fee quote and ask for the review in writing.
Get Financial/Accounting Advice
Again, take all the financial information provided (and ask for anything that isn’t) and go to a business advisor or accountant who has worked with franchised businesses for advice.
PROFESSIONAL ADVICE:
There is a page in the Disclosure Document where the franchisor advises you (as required by the Code) to take legal and business advice. You will need to sign that you have done so, or that you have declined to do so. Remember, you wouldn’t buy a house without a pest and building report, and this is the same. Get professional advice. It is the final piece of insurance that you are investing in a business that really is right for you.
I have been recruiting franchisees for over 15 years, and have granted hundreds in industries ranging from food and beverage, gyms, childcare and education, to health and beauty, financial, professional and trades services. I won’t grant a franchise unless a candidate has considered a number of options and clearly explained why this is the right franchise for them and their family. So take the time to make sure you are buying the best franchise for you – not just the first one you find. Signing the franchise agreement is not the end of your search; it’s the beginning of your new career!
James Young heads up the recruitment division at DC Strategy. He has recruited franchisees for well over 40 major franchise networks in Australia and internationally and has been a State Development Licensee in two states and a multi-unit franchisee for Hairhouse Warehouse where he also held roles in both national recruitment and leasing. Hands-on experience on both sides of franchising gives him a unique perspective. He is also a licenced business broker who assists franchisors with exit strategies and negotiations and franchisees looking to sell their franchise business.
DC Strategy is the only end-to-end franchise consulting, legal, recruitment, franchise brokerage and brand, marketing and technology firm. For over 30 years their experienced specialist teams have developed franchise programs for many of the most successful national franchises,many of which they’ve taken to the world. In the last decade alone they have built over $1.8 billion in enterprise value for their clients. They have also brought many well known international franchise brands to Australia and assisted many franchise networks to exit. DCS’s expert franchise lawyers offer fixed fee franchisee legal reviews.
Contact James on:
0404 078 782
james.young@dcstrategy.com
www.dcstrategy.com