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Buying a Franchise through the Eyes of a Franchise Expert

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After having been involved in franchising for almost my entire business career my knowledge of franchising qualifies me as an expert. Through my experience and expertise I feel that I知 in a unique position to give useful tips regarding how I would evaluate a franchise opportunity.

We値l begin by making three assumptions about my buying a franchise:

  1. Assume that I致e already identified a franchise opportunity that fits my personal, business and financial profile and my application has been approved.
  2. I have obtained a copy of the Franchise Disclosure Document and confirmed that it痴 current and if required, properly registered in my home State.
  3. I値l use a trusted friend or advisor to provide objective advice and counsel. Often a third party that is not directly involved can offer a perspective or opinion we might not consider.
 

Following are the key areas that I would focus on:

  • Gathering as much data on the sales potential of the market/territory I値l be operating in. I want to know as much as possible about my market, especially future potential. I値l use every resource available including demographic data from the Census Bureau, Commerce Department, competitive information and I値l contact local business groups such as the Chamber of Commerce. I値l also request market information from the franchisor regarding the rationale for defining a territory. The type of response and quality of the information I receive from the franchisor can be a deciding factor in my decision to purchase the franchise.
  • I値l test the math regarding franchisee gross margin and the relationship to the royalties. My concern is that the gross margin I can earn bears an equitable relationship to the fees I値l pay the franchisor. I don稚 want to pay an 8% royalty if the gross margin percent is in the 20痴. When I do a break-even analysis this factor will come into play.
  • The requirements and practice regarding an advertising fund will be of interest. Is the fund fully operational? Is there more than one ad fund? Some franchise agreements have a national fund and the requirement that a franchise participate in a local advertising cooperative. What role do the franchisees play in the administration and use of ad fund monies?
  • I will have my accountant thoroughly review the franchisor痴 financial statements with a focus on the source of revenue and any positive or negative trends. My interest will be to identify the source and level of capital that the franchisor has. Financial stability is important in terms of the franchisor being able to service and support its franchisees.
  • When I speak with current and any terminated franchisees I値l want to know how long it痴 taken them to reach break-even. This is in addition to other questions I値l ask. The franchisees I speak with should represent a mix of new and older tenured franchisees. I will ask the franchisor the same question, recognizing I may not receive a response. I値l use this information when constructing a break-even model.
  • I値l do a thorough review of franchise relations and litigation history (available in the FDD) by asking the franchisees if they have had a problem or issue how long it took them to get it resolved. Who did they speak with? Any litigation in the FDD would need to be explained to me by the franchisor.
  • I will want to meet with the CEO or President in order to understand their role in the day to day operation of the franchise. What is their strategy for growing the franchise network? Do they seem to be the type of person that I could work with?
  • I want to carefully review the qualifications and experience of the franchisors staff. My primary objective is to confirm that the people I値l rely upon have the experience and maturity to support my franchise. An important consideration will be the trainer and the training curriculum.
  • If I gather the right information and answers then I値l want to work at a franchise location for a minimum of 2-3 days in order to fully understand the role of the franchisee and what it takes to operate the business. If I have to sign a non-disclosure with the franchisor then I will.

In addition to the above I値l perform a comprehensive due diligence before I decide to sign the agreement and write the check.

This is the approach and process I would follow if I were going to purchase a franchise. I could always add more however, this article would turn into a book.

ゥ 2010 FranchiseKnowHow, LLC

Ed Teixeira is the President of FranchiseKnowHow, LLC. He can be reached at franchiseknowhow@gmail.com

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