This is a fabulous time to buy a franchise resale. Why? for many reasons. First, during the last 20 years many franchises have been built and run successfully by their dedicated owners and now as the baby boomers enter retirement, their children do not want to continue the family franchise business.
Let’s face it some children grew up with and in those businesses, whether they were KFC’s, Subway or Jack-in-the Box and the like. They just do not measure up to the expectations of the newer generation.
Secondly, having observed their parents and family members work the various franchise systems, children have “heard” the other side of owning a franchise when their parents came back after a hard days work and moaned and groaned about how hard it was getting and how tired they were; they do not want to be in those same shoes.
Yet precisely because these owners have created good businesses, it makes the franchise more appealing to new entrants to the proven system as new opportunities within fade and territories have been developed; the maturity level of the brand and the location can pencil out into a great investment in a going concern from the point of view of someone who is leaving the corporate world in order to be his own boss, or one just considering a safe business investment for the first time. Others have accumulated sufficient funds for retirement and have built substantial equities in their homes thus providing a good source of funds for a healthy down payment and a low debt repayment schedule, leaving an adequate supply of business cash flow to be enjoyed.
So I say buy right, into a proven and dependable brand and follow these tips:
1. Do not overpay for the business and keep the numbers real. Get a valuation on the franchise if you are not sure what a fair price is
2. Do not pay for projected future earnings increases or undeclared cash sales; stick to past performance and whatever you earn extra through your hard work is a return for that work and for which you should be compensated when you sell
3. Ask for seller financing for about 50% of the price you settle on; if he believes in his business location and the franchise system, he should back you in it, provided you follow that proven system. You may have to provide other collateral.
4. Do your due diligence and talk to other franchise owners in that franchise to test their own experiences; you will be surprised how forthcoming they are with the details
5. Calculate your Return on Investment in the franchise vs. other safe investments; remember to add the build up in equity as you pay off the note as part of your analysis
6. Analyze all encroachment issues and due diligence matters; ask for a seller’s disclosure statement for further protection
7. Check on franchisee turnover for that location and customer reactions at the location to see where you can improve; after a while some franchisees put their stores on “cruise control” which is another indication that operational standards and customer service levels may have started to slip. These are great opportunities
8. Decide on a time limit that you will devote to that franchise system, before the burn out syndrome infects your own demeanor and efforts; then it will be time to get fresh blood and sell and so the cycle continues.
9. Recent adverse publicity and litigation may signal a good buying opportunity. Investigate.
10. Only buy a business which has good books and records and is presentable
In a nutshell the biggest problem in buying an existing franchise is a failure to do your homework in the following areas:
Inaccurate cash flow analysis (Owner compensation, debt service)
Paying far too much over market price (A Franchise Valuation can be a good guide)
Cursory due diligence investigation on the franchisor ( Subway, Quizno’s, Schlotsky’s)
Inadequate comparisons of industry competitors and newcomers (Extreme Pita a case in point)
Relying entirely on what your Uncle says instead of getting an independent second opinion
Joining a franchise which is already past maturity and saturated, without territorial protection
Not interviewing a cross section of franchise owners and experts and keeping an open mind
Improper structuring of the deal as an all cash event, without any seller financing
There are plenty of good franchises out there for resale – go get them!