Should I buy a franchise opportunity?
Like any other business opportunity franchises require a buyer to ask the right questions and follow through on their due diligence. For this article, we are discussing franchise opportunities that are bought and started up, (not buying an existing operation) and franchises that are accessible to “Main St” operators. Large national franchises like McDonalds, Dunkin Donuts etc are not readily available to individual investors.
Buying a franchise does not reduce risk or mitigate the need for a thorough analysis, but unfortunately many franchise buyers assume that a franchise is a low risk concept and the operational systems are a guarantee of success.
Why do people buy franchises?
Again, a franchise can be a proven business model that gives first time buyers the confidence and support to be a business owner. A franchise’s ready to go systems, corporate training and logistics can ameliorate a lot of headaches and missteps common to a business start-up. For an inexperienced buyer, that can seem very appealing. But franchises are not without their own risks and problems. Following are issues to address and questions to ask.
Proof of concept:
Does the franchise opportunity have a proven track record? Many franchises are marketed nationally with just a few opened stores. That may not be enough to prove that the concept will prove out.
How many franchisee stores are in operation? Keep in mind that corporate owned stores can have a different cost structure or have centralized management.
Geography. Does the franchise work in your geographic area? Many franchises fill a regional niche or demographic that may not translate well to a different part of the country.
Demographics. Many franchises work well in high population/high density markets. Rural states may not have the demographics necessary to sustain the business.
Franchise Fees:
Initial Fee. What is the initial franchise fee? This is on top of any other start-up and build-out costs. Some franchises also require you attend corporate training. That training and travel may not be included in the franchise fee.
Ongoing fees. Franchises usually charge a franchise fee as a percentage of sales. There also may be another fee for marketing. Finally, franchises may also require you to buy all products and supplies from them, which can cost you a premium over similar goods. All together, these fees can be more than 10% of gross sales!
Performance:
Will the franchisor provide you with real financials of other stores?
Can you contact other franchisees to discuss their business?
Franchise Agreement:
These agreements are usually very restrictive: setting limits on territory, products, pricing etc. You probably won’t be allowed to sell other non-franchise approved products and may not even be able to buy regular supplies (cleaning, stock, paper) from anyone other than the franchisor.
Selling your franchise business:
Most franchise agreements include the franchisor having final approval on a buyer for your business. They may be reluctant to take a chance on a new buyer if you’ve been performing well and paying your franchise fees. Finding a buyer that is interested, financially qualified and able to get franchisor approval may be difficult.
These are just a few issues you should consider when analyzing a franchise opportunity. If you’re going to buy an existing operation you’ll have the benefit of reviewing real historic financials to make a determination on price and value. If you are considering a franchise start-up be objective—don’t assume that you are guaranteed success based on the strength of the concept alone
