Franchise Candidates Should Act Like Investors Not Buyers
by Ed Teixeira
When seeking a franchise opportunity it’s important to take off the
buyer’s hat and put on the investor’s hat. Here are some tips on how to
facilitate the switch.
Whether it’s a search on the Internet or the title of a franchise article, a
frequently used term on the subject of franchising is “buying a franchise.”
However, the truth be told, a much more accurate term would be investing in a
franchise. If an individual tells a franchisor representative that they would
like to invest in a franchise, you can expect the franchisor representative to
equate investor with someone who will not be involved in the day to day
operation of the franchise. I realize this can be considered splitting hairs but
in reality the difference between an on-going business and a franchise is the
fact that the on-going business has revenues and is up and running. The major
distinction between the two entities is that an independent business is
dependent upon the owner, while a successful franchise requires the support and
actions of the franchisor in addition to the efforts of the franchisee. This is
a major reason why when considering a franchise opportunity the candidate should
play the role of investor versus the role of franchise buyer.
To be in the franchise investor role follow these tips:
- Determine the return on your investment. Go
through the franchise process with the objective of identifying
the anticipated return on the investment you’ll make. Being your
own boss and having a degree of personal independence are some
of the benefits of operating a franchise, but you need to earn a
fair return on your investment. Otherwise, invest in rental
property or a solid mutual fund. Unless you have the right
business credentials you should engage professional advisors
such as an accountant to help you analyze your investment. One
of the leading causes of franchisee failures is under
capitalization or making the wrong investment.
- Act like an investor not as a buyer. There
are psychological differences between being a buyer versus an
investor. When we act as a buyer, the expectation is to be sold
or convinced why we should buy. There is a more emotional aspect
to the buyer- seller relationship. As a result, some buyers can
be susceptible to effective sales tactics. The investor has a
different perspective. When investing, most people focus on the
financial aspects of the transaction and less on emotional
elements. This doesn’t diminish the importance of relationships
in a franchise company but it shouldn’t be the most important
- Establish a value on the franchise investment.
Do a break even and return on investment analysis. If
you can’t do this, then use a professional to assist you.
Although you won’t have a crystal ball, you can forecast
potential franchise earnings of the franchise and equate the
probable results to your investment. Even if you’re off by 10 or
20%, its better than having no forecast. Be skeptical of mature
franchisors that fail to make an Item 19 disclosure of
franchisee revenues or earnings.
- Speak with as many franchisees as possible and ask
lots of questions. Obtain as much financial information
as possible from current and former franchisees. You’ll need
this information, in addition to valuable feedback on franchisor
support and other areas.
- Use a franchise attorney and accountant to review
the Franchise Disclosure Document. Although you’re
conducting your due diligence with an emphasis on the financial
aspect of the franchise don’t neglect the other components of a
thorough franchise evaluation. The franchisor financials can
reveal a great deal about the franchisor, but it takes a
qualified person to spot problem areas and red flags.
When considering a franchise opportunity, individuals need to have the
mindset of an investor, not a buyer. An investor looks at a business opportunity
from a different perspective compared to a buyer. Most importantly, don’t allow
yourself to be sold!
© 2011 FranchiseKnowHow, LLC
Ed Teixeira is the President of FranchiseKnowHow, LLC. He can be reached at