Franchising

When buyers choose to purchase an existing franchise they can enjoy the benefits of regional or national recognition as well as a history of revenues and profits from the location. Buying an existing franchise is somewhat different than buying any other type of business because you are essentially purchasing the business from the seller (franchisee) and the rights to the franchise from the franchisor (company that owns the franchise.) Here are a few suggestions on things you should do before and after the closing:

1. Have a qualified franchise attorney review the Franchise Disclosure Document (FDD) - This should be the very first piece of due diligence you seek. The franchise agreement signed by the previous owners may not be the same agreement you will be subject to perform by. Attorneys are best used as "preventative medicine." They become very expensive and the legal process is very slow when you use an attorney to help you after the problems have arisen. You should seek out an attorney that has experience with franchise issues. Your acquisition may be subject to transfer fees, back royalties, or the franchise may have first right or refusal to buy the business.

2. Have a firm understanding of all franchise related fees - Franchises have several fees that they charge. Franchises will frequently charge an upfront or initial fee as well as a transfer fee. Other fees may include a flat rental fee and/or a royalty based on the gross sales or gross profits. There are also a whole group of other fees the franchise may charge and you need to be aware of when and how the franchise fees are paid, what these fees go to, and what happens if you are slow or don't pay a fee.

3. Compose a new marketing plan and submit it to corporate BEFORE closing - Several business buyers are seeking existing franchises that they can fix up and turn around to make more successful. I recently heard of one story where a seller told the buyer that all they needed to do was increase sales, and the seller even defined a plan of attack on behalf of the new buyer to increase sales. Regretfully the seller did not get his marketing and sale strategy approved by the franchisor. Consequently the new business owner failed because the franchisor was not helpful on turning around the business. By submitting a new marketing plan to the franchisor before you finish the acquisition you will know whether or not the franchisor is supportive to you.

4. Contact several other franchise owners with similar demographics - This is so basic but very few franchise buyers do this! You need to contact several franchisees and discuss your business plan with them to increase or sustain sales. I recently heard of a franchisor that has started three (3) franchises that have all gone bankrupt!

5. Avoid existing franchises with higher than a 5% failure rate or a 10% transfer rate - In my opinion this is a big reason to run, not walk away from a franchise! When you buy a franchise you are buying a proven business model. If the model isn't working - don't buy it.

6. Avoid buy new franchises - I recently had a franchise salesman contact me with a really neat franchise idea or concept. I listened to the franchise pitch, he explained that there was an existing store that had been opened for almost two years and the flagship store had been very successful. He explained that as the new franchise was being rolled out they were offering a discounted franchise fee for the first few people who signed up for the business. I seriously considered investing in this franchise, and such as all business decisions I called my long term friend and advisor. He pointed out to me that you buy a franchise because it is a proven business model. If the franchise hasn't been in existence for awhile, it's not a proven business model.

7. Consult your franchise attorney (again!)- Franchise attorneys are great resources. They understand that with certain franchisors terms can be negotiated. However there are established franchisors that will not budge on terms of the franchise agreement.