Key Considerations When Purchasing A Franchise

A New or Existing Franchise?

Is it better for your client to go with something that's already established, or to start fresh? This is the first question that needs consideration when looking at franchise businesses. Both options have their pros and cons, so it's crucial to look at each carefully before making a final decision.

For starters, purchasing an existing franchise offers an established track record, in-place supplier relationships, a trained staff and an existing customer base. However, having all of this in place doesn't necessarily mean it's the right business. You and your client will want to go over detailed financial statements that go back a minimum of three years. Doing so will give you a better understanding of the business' high and low points, which is critical when negotiating terms of the deal. It will also inform you of any warning signs you should know about.

Investing in a new franchise carries somewhat more risk, but also great value. With a new franchise your client will be able to start from scratch and build the business as desired. There will be no worries about former customer impressions or the mistakes the previous owner might have made along the way. New franchises also tend to cost less because the buyer is not purchasing past cash flow or paying a higher fee for goodwill. Yes, this approach requires a little more elbow grease, but your client will gain the satisfaction of having independently built a thriving franchise business.

Look at the Total Cost

Too often, franchise buyers lose sight of the total cost of their purchase and end up spending more than their original budget. For instance, the attorney should inform the buyer about additional fees and royalties. These might not seem like much on their own, but when added to the total cost of the business they could influence your client's investment decision. It's also not unusual to have to pay an upfront franchise fee, which can range anywhere from $5,000 to over $100,000. If the initial fee exceeds $200,000, your client might want to reevaluate the options. If a high amount is being asked as a franchisee fee, your client might need to consider if it would be preferable to consider another option that would instead allow the buyer to invest that extra money in operation of the business.

A franchise purchaser may also be required to pay other fees ' for renovations, marketing campaigns, training programs, leasing equipment. The purchasers may also have to hand over a certain percentage of annual sales. These fees are sometimes hidden in the franchising agreement, so make sure your client is made aware of the fine print.

Brand Perception

No one should ever purchase a franchise without evaluating consumers' perception of the brand. There's nothing worse than getting stuck with a franchise that has a reputation of providing poor service or delivering a low quality product. This just creates another obstacle that your client will have to spend time and money on. It is therefore imperative that you advise your client to choose a franchise that already has a strong customer appeal that is likely to endure.

Management Flexibility

Purchasing a franchise includes certain operational limitations. Most franchises have a set of guidelines on how the business should be operated and marketed ' some stricter than others. Be sure you explore these limitations with the franchise's corporate office to see how much control your client will actually have. If the potential business owner wants to have the flexibility to choose what promotions to run and what suppliers to use, then look for a franchise that offers more flexibility. If your client would rather focus efforts on the day-to-day operations, then it's probably best to select a franchise that handles most of the details for its franchisees.

Conclusion

Owning a franchise isn't for everyone, but for those who have taken the time to do their homework, and know what to expect, it can be an extremely rewarding and lucrative experience, both financially and professionally. A knowledgeable franchise attorney can help to guide the future business owner, advising about the pros and cons of different franchise types, the hidden costs that might be involved in owning a franchise, and the management issues that might arise. By taking advantage of this and other resources, the franchise purchaser is more likely to go into business with eyes wide open, ready for the challenges that lie ahead.

Bob House is general manager for BizBuySell.com and BizQuest.com, an online business-for-sale marketplaces. House is a recognized spokesman on small business transition issues, having contributed to numerous publications on the topics of small business acquisition, small business valuation and the business-for-sale market.

Buying a franchise can be a great path to business ownership for your clients. Unlike starting a business from scratch, they will be able to leverage the benefits of an established brand and a proven operating plan. But how to decide which franchise to buy?

Determining which franchise is the right fit requires careful evaluation and research of the brand's market potential, competition, and management flexibility ' just to name a few. Needless to say, there's homework to be done. No one should purchase a franchise based on who makes the best burger or gives the best haircut.

Here are a few things you and your client should consider when navigating the search process for your ideal franchise.

A New or Existing Franchise?

Is it better for your client to go with something that's already established, or to start fresh? This is the first question that needs consideration when looking at franchise businesses. Both options have their pros and cons, so it's crucial to look at each carefully before making a final decision.

For starters, purchasing an existing franchise offers an established track record, in-place supplier relationships, a trained staff and an existing customer base. However, having all of this in place doesn't necessarily mean it's the right business. You and your client will want to go over detailed financial statements that go back a minimum of three years. Doing so will give you a better understanding of the business' high and low points, which is critical when negotiating terms of the deal. It will also inform you of any warning signs you should know about.

Investing in a new franchise carries somewhat more risk, but also great value. With a new franchise your client will be able to start from scratch and build the business as desired. There will be no worries about former customer impressions or the mistakes the previous owner might have made along the way. New franchises also tend to cost less because the buyer is not purchasing past cash flow or paying a higher fee for goodwill. Yes, this approach requires a little more elbow grease, but your client will gain the satisfaction of having independently built a thriving franchise business.

Look at the Total Cost

Too often, franchise buyers lose sight of the total cost of their purchase and end up spending more than their original budget. For instance, the attorney should inform the buyer about additional fees and royalties. These might not seem like much on their own, but when added to the total cost of the business they could influence your client's investment decision. It's also not unusual to have to pay an upfront franchise fee, which can range anywhere from $5,000 to over $100,000. If the initial fee exceeds $200,000, your client might want to reevaluate the options. If a high amount is being asked as a franchisee fee, your client might need to consider if it would be preferable to consider another option that would instead allow the buyer to invest that extra money in operation of the business.

A franchise purchaser may also be required to pay other fees ' for renovations, marketing campaigns, training programs, leasing equipment. The purchasers may also have to hand over a certain percentage of annual sales. These fees are sometimes hidden in the franchising agreement, so make sure your client is made aware of the fine print.

Brand Perception

No one should ever purchase a franchise without evaluating consumers' perception of the brand. There's nothing worse than getting stuck with a franchise that has a reputation of providing poor service or delivering a low quality product. This just creates another obstacle that your client will have to spend time and money on. It is therefore imperative that you advise your client to choose a franchise that already has a strong customer appeal that is likely to endure.

Management Flexibility

Purchasing a franchise includes certain operational limitations. Most franchises have a set of guidelines on how the business should be operated and marketed ' some stricter than others. Be sure you explore these limitations with the franchise's corporate office to see how much control your client will actually have. If the potential business owner wants to have the flexibility to choose what promotions to run and what suppliers to use, then look for a franchise that offers more flexibility. If your client would rather focus efforts on the day-to-day operations, then it's probably best to select a franchise that handles most of the details for its franchisees.

Conclusion

Owning a franchise isn't for everyone, but for those who have taken the time to do their homework, and know what to expect, it can be an extremely rewarding and lucrative experience, both financially and professionally. A knowledgeable franchise attorney can help to guide the future business owner, advising about the pros and cons of different franchise types, the hidden costs that might be involved in owning a franchise, and the management issues that might arise. By taking advantage of this and other resources, the franchise purchaser is more likely to go into business with eyes wide open, ready for the challenges that lie ahead.

Bob House is general manager for BizBuySell.com and BizQuest.com, an online business-for-sale marketplaces. House is a recognized spokesman on small business transition issues, having contributed to numerous publications on the topics of small business acquisition, small business valuation and the business-for-sale market.