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Are you buying a business or buying a Job?
Before you consider buying a franchise, it might be a good idea to think about what you are buying. And as with any business relationship, it is important to understand what both sides are getting out of the deal. Consider it from the seller’s (Franchisor) point of view. They have a good business concept. For the sake of discussion consider a franchisor called Mc Burgers. Why wouldn’t the founder Ms Mc Burger cash out on her concept by opening a bunch of restaurants her self and hiring managers to run the place. She can assume that the salary of a manager would be less than a franchisee would make in a year. One set of rational for franchising is that by partnering with local business owners a concept can get going faster, the local business owners and help fund an expansion by investments in their businesses, franchising provides a workable management structure, and it mitigates the cost of employee fraud. In the long run, this can provide a win-win arrangement. Both the franchisees and the franchisor are better off than if the franchisor tried to operate all the local units itself.
Another rational for franchising is that you can quickly extract the most money possible from a business concept by selling it as a business idea by getting the most you can out of franchisees. If they don’t make it, the franchisor has her money and could possible resale the franchise to another business dreamer. This modus operandi has robbed thousands of investors over the years. The Federal Trade Commission and California Attorney General have tried to crack down on these practices, but they are still prevalent. Franchisors are regulated in terms of what they can promise and what information they have to disclose. FTC brochure http://www.franchise.org/uploadedFiles/Prospective_Franchisee/Franchising_Basics/FTCBuyingAFranchise-AConsumerGuide.pdf
In many respects, buying a franchise is like buying a job. The company gives you an operations manual that tells you how to operate, and the monitor your franchises to make sure you are operating with in the guidelines. Although it would be cheaper in most cases to start a similar business on your own, the franchise fees can be well worth the money. You are purchasing a proven system. You don’t have figure out what works. The franchisee also benefits from cost savings in advertising. Advertising is done for a group of franchisees in an area and the costs are divided. In some cases it would be impractical for a stand alone business to advertise on the scale necessary to drive customers in the door. TV and radio advertising are just too expensive. The other advantage is that you are buying a customer relationship. People like to deal with a brand they know. The best example of this is Holiday Inn. They grew along with the interstate highway system. The Holiday Inn may not have been the best motel value as drivers exited the freeway, but customers knew what to expect. Why take a chance on something different?
Where can you find Franchise Opportunities?
- International Franchise Association http://www.franchise.org/
It may be more advantages to purchase an existing franchise. You can find them through the franchisor who has bought them back or through business listings. Three places to start looking are:
- The California Association of Business Brokers http://www.cabb.org
- The International Association of Business Brokers http://www.ibba.org/
- Loopnet www.loopnet.com Their business section is kind-of limited, but sometimes they do have some good franchise opportunities.
Open Fran http://www.openfran.org takes publicly available information about franchisors including franchisee litigation and offering circulars and makes it available on line. The search feature is a bit obtuse. The circulars come from the California Department of Corporation which makes that information public.
American Association of Franchise Dealers http://www.aafd.org/ This site has a lot of information and leads to franchise consultants and attorneys.
Blue Mau Mau http://www.bluemaumau.org/ this site has a lot of information. Dig through it. It also has leads to attorneys and consultants.
Unhappy Franchisee As the name implies, this is a blog where franchisees complain about their experiences. It’s not a substitute for investigating a franchise opportunity, but if there are a lot of complaints that should be a red flag.
Deciding to Buy
A book that will provide a lot of great background information on how to buy a franchise is:
Once you see a franchise that you are interested in, go ahead and see if there are any other similar businesses. The one you are interested in may not have any opportunities near your home. Remember that you also have the opportunity to buy an existing franchise. Contact a business broker to help you find one.
If you have an interest in buying a franchise, you have the right to view their Uniform Disclosure Statement. The franchisor may have tasked a sales person to you after they see that you are a qualified buyer. Remember that the franchise salesperson and your business broker may not have your best interest in mind. They are both working on commission.
By law, they have to give you the disclosure documents a minimum amount of time before you purchase. You have the right to take your time and look them over. If they do not give you the documents, or tell you that you have to buy by a certain date those are red flags. The disclosure will, by law, provide the following information:
- List of Franchisor officers
- Pending lawsuits against the company
- Prior bankruptcies of officers or the company.
- Number of existing franchises and how they plan to expand the number of franchisees
- The number of failed franchises.
- The percentage of franchises that are doing well by achieving a profit level
- List of franchisees
- Franchisor financial statements.
A logical place to start is to talk to the actual franchises. The list provided will give the owner’s contact information. While an unsuspecting franchisee may be annoyed with a call out of the blue; you should be cautious of the references provided by the salesperson. They could be actors for all you know, or have been pressured to talk nice. That’s why the FTC requires a list of actual franchises be provided to you. As we have said before, ask if you can volunteer in one of their businesses to see if you like it.
When you interview a franchisee, be sure to ask open questions and probe for their opinions. You can also ask employees about the franchise. They may know a great deal. If you are putting a great deal of money into the franchise, you should have an attorney who specializes in franchises look over the agreement and advise you on it. We could go on, but what’s the point. The book above does a great job of explaining the franchise purchase process, and you can get a used copy for less than ten bucks.
Good Books about Buying Franchises
This is a classic book and is available on Amazon (used for less than $1) or for free at your local library.