Buying a Franchise (New or Resale)
Buying a franchise can be a good option, especially for someone going into business for the first time. There are essentially two ways of acquiring a franchise: you can acquire a new franchise or purchase an established franchise unit from the current franchisee (a resale). In fact, franchisors have existing units for sale from time to time and depending on the circumstances, these units can be a good investment.
If you have the opportunity to purchase a franchised unit that is not operating to its full potential, which is part of a good franchise system, it may be a good investment depending on the price and the reason it is underperforming. For example, if the location is good and what is required to raise the performance is related to such matters as inferior customer service, poor budgeting, lack of cost controls, and inefficient inventory management it may be a good investment, as these things typically do not require major investment.
Everything is relative so you when you evaluate the business opportunity you have to take the price into consideration. If the seller is asking full value and not discounting the price to reflect the situation it may not be such a good investment. You will need the franchisor’s approval to take over the franchise and in most cases you will be required to attend and pass the franchisor’s training program.
Unfortunately, a large number of people view franchising as some sort of magic wand or guarantee of success, and fail to carry out proper due diligence. Franchising is not a guarantee of success or the accumulation of great riches. Certainly, some franchisees enjoy a good return on investment in addition to paying themselves a good management salary, but others work harder than they ever imagined with little or no franchisor support, no profits, and no chance of selling their business. Franchising is usually a safer investment than opening a similar independent business, if the franchise is part of a solid franchise system.
When considering a franchise it is essential that you carry out greater due diligence than if you were buying an independent business. If you are interested in acquiring a resale franchise you need to carry out due diligence on both the franchise and the business itself. Success in franchising is based on mutual dependence, so it naturally follows that the search for a franchise is a mutual investigation process. It is important to evaluate both the franchisor and the franchise. In addition to any legal disclosure requirements, the Canadian Franchise Association (CFA) has mandatory disclosure requirements for its franchisor members.
Reputable franchisors go to great lengths to select a franchisee. If a franchisor fails to investigate you as thoroughly as you investigate them, be cautious. If a franchise is awarded to a franchisee that is unable to operate it successfully, the franchisor will suffer almost as much as the franchisee that fails. Not only does the franchise unit fail to produce an ongoing revenue stream for the franchisor, but it can also take up a tremendous amount of the franchisor’s time and effort to either salvage or resell the franchise.
A franchisor is obviously not gambling its entire reputation on you; however, you are probably betting a good deal of your future on the franchisor, so don’t hesitate to ask a lot of questions. A franchisor that is offering a legitimate opportunity and has nothing to hide should have no hesitation in providing the necessary information to a qualified franchise prospect and should respect the fact that you are investigating them in much the same manner as you are being investigated.
Balance Your Decision-Making
To be a successful franchisee you must:
(a) have a passion for the business,
(b) understand the business, and
(c) be capable of financing it.
Obviously, you should not consider a franchise that is beyond your financial means. Emotion and logic should be equally balanced when making the final decision about purchasing the franchise. You should feel good about the people involved in the franchise, and excited about the opportunity, however, logic has to be applied to the decision-making process in such areas as consumer acceptance, risk analysis, availability of product, demographics etc. Ask yourself, “Does this all make sense?” Your emotional commitment is only one of the essential elements, and if any of these elements is missing, the franchise is probably not right for you.
Norman P. Friend
President
Franchise 101 Incorporated.
