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Buying a Franchise, Due Diligence

Written by: John Power

Article Overview: Buying a franchise is a major investment. Buyers should carefully consider various aspects of the offering before making the purchase. Here are some suggestions.

Buying a Franchise, Due Diligence

Start by picturing yourself working in the franchise. Does it seem like something you would like to do? Do you have any related experience? (The franchisor will tell you that you don't need experience, because they will train you, but related experience is always helpful.) Consider the position of the franchise in its industry and the maturity of the industry. Read about the industry by searching for information on the internet. Is the industry growing, mature, or perhaps even declining? The instant print industry has been shrinking for several years, but there are still companies trying to sell printing franchises.

Franchises that offer pack-and-ship, tax accounting, and pizza restaurants, for example, are all in very crowded territory and the franchise offered must truly offer something extraordinary to stand out. There are many "me-too" franchises on the market.

Carefully study Item 7, Estimated Initial Investment, in the Franchise Disclosure Document. Does the cost of opening the franchise seem reasonable? Show the numbers to someone else, who has opened one or more businesses, and get their feedback.

Consider several different franchises, in the same and different industries. Gather marketing information from the internet and from the franchisors themselves. Searching for "franchises for sale" on the internet will bring up many sites that offer information about franchises for sale.

Franchisors are required to provide you with a list of current franchisees, when they give you the Franchise Disclosure Document. And, they must give you a copy of the document "early in the process" when you ask for it, unless they decide that they no longer want to consider you as a franchisee.

Speak with a few franchisees and ask them about the training they received, how supportive the franchisor is, how their business is doing, and if they would buy the franchise again. Randomly select those you wish to contact to get a good cross section. The franchisor is not supposed to direct you to a select list.

Here are a few additional things to consider when buying a franchise:

--What is the franchisor's position in their industry. Be wary when anyone says "We have no competition." There is always competition, or there soon will be.

--What are the requirements to participate in the business? If you can't turn it over to a manager, once it gets going, you may find that you have bought yourself a job.

--What is the size of the territory? It should be large enough for the franchisee to be successful, but small enough that the franchisor can realize its potential.

--When buying from a smaller franchise, sometimes they are willing to negotiate or even finance the franchise fee. Ask about this.

--What is the lease exposure? A $35,000 franchise fee does not seem so scary when compared with a $300,000 lease that you must personally guarantee.

--How many employees are required? Being an employer is a new experience for many franchisees.

--What must you buy from the franchisor, and how much margin does he have in it? This is a required disclosure in the FDD, so look for it.

--Are the ingredients, inventory items, or equipment at the high-end of the price range in the industry? You want to be sure you can be competitive.

--What is the advertising program? How much of it will benefit your location?

--And, it is a good idea to spend some time searching on Google to see what type of information there might be about the franchisor on the Internet. If you find "bad press," you might move to a different opportunity.

More information can be found at: www.biltmorefranchise.com

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Article Tags: accounting, disclosure document, franchise disclosure, franchisee, franchisees, franchises for sale, franchisor, franchisors, initial investment, marketing information, maturity, nbsp, pizza restaurants



Related Forum Posts
Re: Enticing Franchises - Top 9 List - All Franchise listed above are in millions of dollars. Do you have the list of Franchise in thousands
Re: Info for would be franchisers... - [quote="Sebastien":1d29sdv1]Like Franchise Times, Franchise Update is a very practical magazine. There is no blah blah, just straight facts that anyone in the franchise community can relate to. I just want to mention that all these magazines are NOT franchisee oriented. I mean these magazines are for franchise professionals. If you're looking to buy a franchise, you won't find much information in there. To answer your question, getting published in Franchise Times was fairly easy. I don't want to brag too much but I think I am known in the franchise industry. I was the marketing guy at Franchise.com for a few years before joining my new company, the World Franchising Network. So people know me and I have a very good relationship with Nancy Weingartner, the Managing Editor at Franchise Times. I was talking with her at the last Franchise Expo South in Miami and she mentioned she'd like me to be profiled. I was like "ok, sure!". I like this franchise executive profile thing in Franchise Times as it is rarely BS. People are usually really natural in there.[/quote:1d29sdv1] Thanks for the follow up Sebastien! And I can't say that I'm surprised that networking with the right people and managing your relationships with them properly are the keys to being published. I guess the old adage holds true of "it's not who you know, but who knows you" that's important.
how much for a franchise fee? - Dear Colleague There is no easy answer to this question. Things to consider: [list=] The sizeof the Franchise Clent base Expected Turnover Intellectual Property costs (recoup) Number of Franchises Number of employees Original Set up costs Franchise admin costs An example: A franchise that I was involved in setting was to a simple "lawn mowing/home repair" franchise. The Franchise included national/local advertising - preparation of client lists - general admin - central accounting etc The Franchise involved 300-500 clients - and an annual turnover of about $300,000 . The annual franchise fee was $30,000. Hope that this gives you some idea Take care Ian[/list]
Re: Franchise Surveys - Another good tool to researching a franchise is to speak with their existing franchisees. This contact information is included in most Franchise Disclosure Documents. In order to get a Franchise Disclosure Document or FDD as it is often referred to, you will have to complete a basic franchise application. The franchisor will then usually provide you with the FDD at that time. Included in that book of information is a list of the existing franchisees, the contract, the investment information etc... This information is required by Federal Law to be disclosed to your prior to making a purchase. So be sure to do your research and start with the Franchise Documents to get the initial information.
Re: Info for would be franchisers... - [quote="Sebastien":2gam0klq][quote="BuzzAroundBooks":2gam0klq]Like Franchise Times, Franchise Update is a very practical magazine. There is no blah blah, just straight facts that anyone in the franchise community can relate to.[/quote:2gam0klq][/quote:2gam0klq] That is really what I look for in any industry publication. We lead busy lives and when people fill their magazines with fluff, not only does it benefit no one, but it makes us truly appreciate those that don't. Thanks!


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