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When you Buy a Franchise Pretend Youíre Selling It in Five Years

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When individuals purchase a franchise most will plan on selling the franchise at some future date or operate it until their children can take it over. Iíve encountered some individuals who plan on operating the franchise for the long term until retirement. If youíre considering buying a franchise a good approach to take is to plan on selling the franchise as part of your analysis. Learn why this strategy can be helpful.

When evaluating a franchise opportunity it might be useful to consider: What if I wanted to sell the franchise in five years? This scenario may not be your actual objective, however, it can change the way you evaluate and consider a specific franchise opportunity. It can create a sense of urgency and a timeline that will emphasize certain aspects of the franchise. Private equity funds and venture capital firms take a cautious look into potential businesses they might invest in. The reason is because they want a return for their investors in a period of 3 to 5 years. This benchmark requires them to evaluate an investment opportunity with a critical eye. You can use this same approach, although you may not have the benefit of Ivy League MBAís to perform the analysis.

In addition to the questions and areas that ought to be a part of any franchise evaluation lets place a bit more emphasis on the following areas:

  • How quickly will the franchise reach profitability? A key item in any evaluation, however, in this case itís key.
  • Is the franchisor stable with a consistent track record of success? Has the franchise experienced some variability in its growth and performance?
  • Is there little or no franchisee litigation?
  • Does the brand have good market penetration? Is the franchise well positioned in specific markets or dispersed in various markets. Strong franchise concepts like Panera Bread require a minimum of three franchise locations in a market.
  • Does the franchise leadership possess sustainable visionary skills and leadership? As a franchise system grows franchisor leadership must be capable of administering this growth.
  • Does the franchisor have a strong balance sheet and a record of consistent income?

When evaluating a franchise opportunity it can be useful to establish a timeline for operating the franchise. Although this may not be your actual objective it can lead you to evaluate a franchise opportunity in a different way. This evaluation can be more critical but the result may raise your potential for success and lower your risk of failure.

© 2011 FranchiseKnowHow, LLC

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

 

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