BUY A FRANCHISE
Why Buy A Franchise
To help you learn more about buying a franchise, below we have outlined the benefits to buying a franchise, a comparison of new development versus existing franchises for sale, how to research a franchise opportunity, and the steps to buying a franchise.
There are several benefits to buying a franchise, these are just a few of them.
One of the biggest advantages to buying a franchise is name recognition. When you hang the sign outside or begin advertising, the consumer already knows who you are and what products or services you offer. That is a great benefit to your initial success. That could take years to accomplish if you decide to start your own private business.
System In Place
When you start a new business there are many things to consider. What products or services will you offer? How do you get the products and supplies to you? What technology do you need? What processes do you need? When buying a franchise, all of these questions have already been answered.
The success of the franchise brand is only achieved if they ensure their franchisees are well trained and have an intimate knowledge of how the business runs. The franchisor will train you on all facets of the business including distribution, product knowledge, operations, technology, customer service, accounting, and more.
New Development versus Franchise Resales
When purchasing an existing franchise for sale, the amount of time to get trained and take over the business is dramatically reduced if there is a requirement for a physical location. When you choose to develop a new franchise, it takes a good amount of time to identify the right spot, negotiate the lease, and build-out the space. However, when you opt for new development, it does allows you to find the best space possible based on the current market data.
When buying an existing franchise business or investing in a franchise opportunity, you will be able to review the financials to get a history of sales, expenses, and profitability. When requesting this information, you should ask for at least the last three years of financials. When you open a new franchise your only tool for forecasting is the success of other locations in the system. This can vary wildly because there are so many variables such as market demographics, competition, competency of staff, and involvement of the owner. Knowing what the franchise business will cost to operate and how much money you can make, you eliminate the uncertainty that you would have when committing to developing a new business. However, if you decide to start a new franchise, your potential for earnings can be greatly increased.
When buying a franchise, the cost in most cases is much less than the cost to develop a new business, especially with an existing franchise business for sale. The factors that can provide you with a lower cost to entry include depreciation of assets versus buying new, the performance of the franchise versus the system average, and the motivation of the seller to divest themselves of the business. The opposite can also be true. If a franchise is performing well above average versus the system, you may have to pay a higher cost to purchase the franchise versus starting a new one. This is a good problem to have. If you are going to buy a high performing franchise, you no longer have the uncertainty of whether or not you will be successful.
How To Research A Franchise Business to Buy
The Franchise Brand
The first step is to get some information about the franchisor. You will want to contact the franchise development team for the brands you are considering. They can provide with great insight, however they are limited on what they can share per the Federal Trade Commission rules for selling a franchise. Here are a few of the questions you will want to ask: 1) History of the company 2) Growth of the company 3) The initial cost for new development to compare to the cost to purchase an existing location 4) Average sales of the system 5) Support 6) Initial and ongoing fees 7) Terms of the agreement. These are just a few of the things you will want to ask. There are additional resources to really dig in and examine the company.
Franchise Disclosure Document
The Federal Trade Commission requires that all franchise companies provide buyers with their Franchise Disclosure Document (FDD). The FDD consists of 23 items that cover an array of information about the company. The FDD can be hundreds of pages long. We recommend that you call one the attorneys listed in the Professional Resources section of the website to review the FDD and the Franchise Agreement contained within the FDD.
Learn More About the FDD
ITEM 1 – This lists all companies past and present that are affiliated with the Franchise
ITEM 2 – This lists the executive team along with the selling agents and their experience. This should be taken into consideration if the company had issues in the past but now has a new leadership team that has resolved past issues and have righted the ship.
ITEM 3 – Litigation – This section lists all of the litigation in which the company has been involved. This will happen from time to time so it certainly doesn’t need to be a disqualifier. The important thing to consider is the severity of the claims and the frequency of the litigatiton.
ITEM 4 – Bankruptcy – This will list any of the executive team or selling agents who have had a bankruptcy in the past. Serves as full disclosure to the potential buyers.
ITEM 5 – Initial Fees – This outlines all of the fees required to get your franchise open. Some may not apply to you if purchasing an existing franchise. Consult the franchise development team to identify which ones will apply to you.
ITEM 6 – Ongoing Fees – This will cover all of the fees you will be required to pay during the operation of your franchise business. This includes royalties, advertising, late fees, etc.
ITEM 7 -Estimated Initial Investment – This will provide a range of costs associated with starting a new franchise. This is usually a large range that will really just leave the question unanswered. Call some current franchisees in your area to get a better estimate.
ITEM 8 – Restrictions on Sources – This identifies the approved vendors in which to order your equipment, décor, supplies, etc.
ITEM 9 – Franchisee’s Obligations – This lists all of your obligatitons as the franchisee that are outlined in the Franchise Agreement
ITEM 10 – Financing – This list resources the franchisor will provide for financing, if any.
ITEM 11 – Franchisor’s Obligations – This is a list of the franchise company’s obligatitons to assist you with getting open. This may not pertain to you when buying an existing franchise
ITEM 12 – Territory – This will outline the geographic area in which you can conduct business without infringement from other franchisees
ITEM 13- Trademarks – Outlines which trademarks are approved for your use and the rules for using the trademarks
ITEM 14 – Patents, Copyrights, and Proprietary Information – Outlines the protections in place for the aforementioned items and your guidelines for use or non-use
ITEM 15 -Obligation to Participate in the Business – This outlines the expectations of you as the owner as related to your participation in the business
ITEM 16 – Restrictions – Outlines the products and/ or services you may offer
ITEM 17 – Renewal – Outlines the renewal terms for your franchise agreement upon expiration
ITEM 17 – Renewal and Terminations – Outlines the renewal terms for your franchise agreement upon expiration. Also stipulates the terms for terminating your franchise agreement
ITEM 18 – Public Figures – Listof Public figures used for the promotion of the business
ITEM 19 – Financial Performance – Perhaps the most important section. This outlines the financial performance of the current franchise outlets. Unfortunately this section is not required. Some franchisors may decide not to list any financial information on their sytem. The other option is to call franchisees listed in the FDD to get insight from them.
ITEM 20 – Outlets & Franchise Info – This section will list the number of stores opened and closed each year and the number of existing franchise outlets at the end of each year. This is great information to understand the historical growth or contraction of the system
ITEM 21 -Audited Financial Statement – This is the financial information of the Franchise company. You will most likely need an accountant to interpret this information for you.
ITEM 22 – Lists all of the contracts that may be required of the franchisee
ITEM 23 – FDD receipt. Acknowledgement that you received the FDD. Required by the FTC. In most cases, you will sign the receipt electronically when you download the FDD.
It is important when speaking to the seller to gain as much information as possible to understand the history and performance of the business. You will want to know how long it has been around, the performance cycle since inception, turnover of staff, and involvement of owner. Of course you will also want to request financial statements for at least the last three years.
There may be no better source of information than the existing franchisees in the system. By calling them you can learn a lot about their general satisfaction, cost to get started, challenges of the business, and financial performance of the business. It will most likely be a numbers game, meaning you will need to reach out to several of them to get a response from a couple.
Steps To Buying A Franchise
New and Existing Franchise Business for Sale
The Approval Process
Before you can become a franchisee you will need to go through the approval process with the franchisor. When you contact the franchise development team for the brand, they will provide you with a list of steps in the process. They will usually start with having you complete an application form. This gives them an opportunity to get to know you better and make sure you have the financial means to accomplish your development goals. Once the application is completed they will send you the Franchise Disclosure Document (FDD). The FDD will also contain the Franchise Agreement. You will want to contact one of our legal experts to assist you with understanding the contents of the FDD and your contractual obligations listed in the Franchise Agreement. In some cases the franchise brand will have a person or group in your region who oversees the development in your market. You will need to interview with them since they will be your main contact once you become a franchisee. If you are ready to move forward, most franchise brands will host you for what is called a “Day of Discovery”. This will entail you traveling to their corporate headquarters where you will be able to meet with the key people in the organization, receive more information about the brand, visit locations, and engage in an interview process. Once you are approved, the franchisor will typically conduct credit and background checks as a last step in the approval process.
One you have completed your due diligence and have decided on a franchise to purchase you will need to put together a business plan. The business plan serves two purposes. First it allows you to document all of your plans to operate, market, and grow your business. It will also allow you to put together a timeline and checklist of everything you need to do to take over the business. Secondly, the bank will want a business plan from you before they will consider loaning you the money. They want to make sure that you have put together a good plan to be successful and have the ability to pay back the loan. In the Professional Resource section of the website we have listed companies who can assist you with writing a business plan.
When buying a franchise, you need to consider how much money you have to invest. As a general rule, the banks will typically finance 75% of the total cost. This means you will need liquid capital in the amount of 25% of the total sale price. Liquid capital refers to the amount of money you have to invest. You cannot get a loan for the 25% and then get a loan for the other 75%. Although we are suggesting the banks will loan approximately 75% of the total cost, the percentage could change based on the type of business, your credit score, and collateral that you have to offer. In our resources section we have banks that you can contact to assist you with the loan process.
The first step will be to form a corporation. There are several types of corporations to choose from. The legal experts we provide can assist with choosing the type of corporation that best suits your needs. They will then form your corporation for you. When it comes to purchasing a business, in most cases the seller will have you sign a letter of intent. This will show your intent to purchase the business contingent on financing, lease negotiations, or other factors. At this point the seller may also want you to pay a deposit or earnest money. This strengthens your commitment to purchase the business. Once all of the preliminary items are completed you will then sign a Purchase Agreement. This is the contract to buy the business. The seller’s lawyer will then ensure there are no liens on the business or any other outstanding issue that could obstruct the deal. Once everything is in order, you will then close.
Before you are able to sign a franchise agreement and take over the business, you will have to successfully complete the training program required by the franchisor. The length of the training program will vary depending on the difficulty of the business. The location of training will also vary. In some cases the training can take place locally and in other cases you may have to travel to their headquarters or other location to conduct your training. The franchisor will provide you with the training requirements and the location.
Contained in the franchise agreement are requirements for a minimum amount of insurance coverage needed for your business. We have partnered with insurance companies in your state who will be able to provide you with insurance for your business as well as any personal coverage you may need. Please visit the Professional Resources page to find an insurance agent near you.
Accounting and Taxes
Owning a new franchise business can be somewhat time consuming considering all of the tasks you have to manage to be successful. One of the most common areas to be neglected is the financial aspect of the business. It is imperative that you keep up with the financial aspect of the business in order to identify issues, protect your investment, and maximize your profits. We have partnered with accounting firms in your area who can assist with payroll, bookkeeping, business and personal taxes. They can be found under the Professional Resources tab on this website.