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The Home Buyers Analogy, Prospective Franchisees Should Follow

by Ed Teixeira

Individuals looking at a franchise opportunity should consider the home buyers analogy.

When an individual embarks on a mission to invest in a franchise, there are numerous steps that need to be followed. These steps or activities in general, include a financial review, operational analysis, a review and analysis of the franchise documents and feedback from existing and former franchisees. However, each of these steps includes additional activities. When considered in total there are a large number of these activities that represent the franchise evaluation process. Yet, there are two components that must be included.

1. Hedge Your Franchise Investment: When discussing investing in a franchise I often use the analogy of a couple looking to purchase a home. They establish a limit to what they can afford as a down payment and how much they can pay in monthly mortgage payments. However, many couples are so impressed with a particular house, they exceed their financial limits, assuming that a few thousand dollars down or a hundred dollars more a month in mortgage payments won't matter that much. Of course, owning and maintaining a home usually costs more than some people anticipate. I draw a similar analogy to investing in a franchise. Some franchisees have scraped together every last dollar to purchase and launch their new franchise. Then, unforeseen consequences arise and the new franchisee finds that they can't obtain or invest additional working capital in the franchise.

The lesson to be learned is to establish an amount you can afford to invest in a franchise and stick to that amount after leaving some funds for future needs. If you can invest $75,000 in cash than reduce that number by a minimum of 10% or $7,500 to allow for future needs. The important point is to establish an affordable amount to invest and stick to it. Don't end up like some home buyers who are so impressed by a home that they over extend themselves financially

2. Utilize a Qualified Franchise Attorney: I continue to be amazed by the number of franchise candidates that forego the services of a franchise attorney and instead try to go it alone. The reason I know this is because I am contacted by prospective and existing franchisees that seek advice but do not wish to use an attorney, in order to save some money.

Returning to the home buyer analogy, consider that with few exceptions an attorney will be involved in the transaction and in most cases representing buyer and seller. Although lenders typically have this requirement, it's also become an expected practice by both parties. If one compares the home buying transaction to investing in a franchise, at least a house is a tangible asset that has a recognizable value. On the other hand a new franchise is just starting up and there the future is unknown. Although the franchise investment is an asset with an unknown value, why would a person invest money and in many cases personally guarantee future obligations without the services of a franchise attorney?

Unless the prospective franchisee has a legal background or understanding of contract law, it doesn't make sense to proceed without the advice of franchise counsel.

Individuals considering investing in a franchise opportunity would be wise to hedge their investment and utilize the services of a qualified franchise attorney.

2015 FranchiseKnowHow, LLC

Ed Teixeira is the President of FranchiseKnowHow.com and Chief Operating Officer, FranchiseGrade.com. He is a former franchise executive and franchisee. He can be contacted at 631-246-5782 or at  franchiseknowhow@gmail.com

 

 

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