Time and again I see franchisees excited about an opportunity to buy into a franchise business and ignoring the basic principles of investigation. Although my experience is in Quick Service Restaurants the same rules apply to buying into any franchise or other small business: Always, always do your due diligence! That means having an expert look into the details of the franchise agreement before you sign anything and having an accountant look at the past 2 years financials for the business if it is an ongoing concern.
Too many times I see people getting into a franchise agreement without really understanding exactly what they have signed. It is amazing to think that people will commit thousands (and that means hundreds of thousands) of dollars of hard earned money into a business without having a clear understanding of the details of the agreement. Often this is because they want to save the lawyers' fees. A foolish mistake. Most franchise agreements are fairly standard but all franchisors will have different terms and conditions and these can make or break a business in some cases. Too often people get a nasty shock when they learn the finer details of the agreement when it is too late to do anything about it. The advice here is to use an experienced franchise lawyer and ask lots of questions. Make sure you understand the implications of everything in the agreement. For example all franchisors have an entry fee which most people understand, but many may not be thinking clearly about the expense involved in exiting the business if it is not successful. Many franchisors have an exit fee that can run into the tens of thousands as well as legal and administration fees along with de-branding and de-fit costs. These fees will normally come at a time when the franchisee can ill afford more expenses.
If you are looking at buying a business (whether it is a franchise or stand alone) always have a financial expert look at the books carefully before you commit. This means not only the past 6 months but back 2 even 3 years. Make sure your accountant drills down into all lines of the P & L statement and that the franchisor has provided sample P & L's from well managed similar type and volume stores for review. All too often an anxious seller will engage in short term discounts to drive traffic and sales to his or her business to make it look as though the sales are actually stronger than they are. An experienced accountant can uncover this kind of activity by delving back into previous years sales and asking the right questions. An unexpected surge in sales in recent months should be queried and could indicate questionable tactics on the part of the desperate seller. Further, I know of one case when the seller actually hid the unethical marketing spend by paying for it out of private funds so it would not show on the P & L!
When you have made the decision to look at the possibility of investing in a franchise business (or any business) make sure you set aside several thousand dollars for due diligence. It will save you in the long run. $2000 spent to tell you that the opportunity is not the right place to invest your $300,000 is really small potatoes in the scheme of things. Due diligence is not the place to scrimp on expenses, save that for running your business.
R.Stevens is a 30 year veteran of the QSR franchise system. He has worked in nearly every operations based position from store manager in his early career to the franchise director of a large well known franshisor in Europe. He has worked both sides of the fence working with the franchisee and the franchisor. His experience spans Asia, Australia, Europe and the United States. He blogs regularly about the QSR and franchise business on his blog where he is hoping to create a dialogue with like minded folks in the business. Check out http://franchiseebuzz.com
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