Tips Before You Buy a Franchise
Information and Assistance for PRE-Franchisees
SO YOU’RE READY TO BUY A FRANCHISE BUSINESS. READ THIS BEFORE YOU BUY.
YOU’LL BE HAPPY YOU DID!
Janet’s Practical Tips
Practical Tips and Traps!
You’ll be amazed at what the “experts” don’t tell you. The most and only advice you get it “READ YOUR CONTRACT.” Sure that is obvious, and you’ll be surprised at how many franchise buyers DON’T read their franchise agreement. AND no one tells you the little things, which just may cost you big bucks; then you’ll be saying, “if only someone had told me”!
Franchise Buying 101- What No One Tells You!
7 Practical Tips no one tells you when you start out.
Read the tips then CALL ME to
Review your Franchise Documents
Tip #1 Talk to Competitors
This is called due diligence on the industry side. Sure you go around and talk to other franchisees in the system you are looking to invest with, BUT, really go around and talk to the competitors in your industry, both franchised competitors and independent competitors. Do as much research as possible to see how viable the industry truly is, not just what the literature says. You’ll need to dig into the major suppliers you will be needing to see if their industry is also stable or growing. If your major supplier goes out of business and you are left with higher priced choices, this immediately affects your bottom line.
Tip#2 Seller Concessions
If you are buying an existing franchise, always, always ask your seller (in the offer/purchase contract) to personally introduce you to the major clients. This will dramatically maintain your customer base after their main contact person leaves. Also, agree for the seller to stay and help you run the shop for at least 2 weeks after the sale closes. This is critical so you can make a smooth transition and address items that come up that were not discusses. Along these lines, always get the Seller’s forwarding information if he is leaving the area. You still want to have someone to contact in case there is something he forgot to tell you.
Tip #3 Have experience in the Industry
This can save you literally hundreds of dollars a year in extra training costs. While most franchisors advertise No Experience Necessary, We will train…yes that is true they will train you how to run your franchise according to their system, but there is truly no substitute for having an actual understanding of how the industry does work, and of already having some connections in the industry. Frankly if you are coming in completely cold, definitely budget for extra training in both time and money.
Tip #4 Don’t Expect to Use Your Business as a Family Employment Agency
While most small businesses do in fact employ family members, it would not be wise to go into your new business with a family of inexperienced workers who quite honestly might do EITHER a good job or bad job, and probably won’t have a lot of caring one way or the other. It is just too important to have people who are experienced in their areas, particularly if you aren’t. And you can rarely “fire” a family member without discord. And family members could develop a feeling of entitlement to their salary, which you may not be able to maintain. Hiring all your family is like “eating all your profits” in a restaurant. You just can not get ahead, unless they are truly dedicated and motivated.
Tip #5 Examine the Franchisor’s Marketing Materials
Most Franchisors create and have available marketing materials that they have paid advertising agencies or employees to create. This is a huge benefit because you don’t spend your time and money re-creating new materials. Ask to see the entire marketing and advertising kits/materials they give or have available to their system. The Franchisor will be proud and eager to show you all their programs, materials and resources to show you how complete their system is. You WILL want to utilize what they give and create for you so be sure to carefully vet out your franchisor by looking at how well, or how often the franchisor has marketing materials created and available, and what any extra costs would be. No matter what your business is, it will live or die generally, on the wealth of marketing and advertising you conduct.
Tip #6 Have More Working Capital Than Required
ALL Franchise Documents will have a section (Item 7) table called initial Investment. The last row will be Additional Funds, which is basically the working capital you’ll need to pay expenses before you ramp up sales. This amount is rarely sufficient because there are always things that come up, and you as the marketer trying to get sales, is a big unknown for the franchisor, who is relying on you to be good at getting sales. It doesn’t always work that way, and stores close due to lack of funds. They run out of money. It happens all the time. If you only have the lowest end of what they recommend for working capital, forget it; look for a different franchise where your reserves are at or in excess of the high end listed. This is the single most important piece of advice. This is true even if you are buying an existing store with decent sales. Whatever your franchisor recommends that you have in working capital for an existing store, you better have at least double. The saddest day in any franchise system for all parties involved, is the day a store closes. Think long and carefully about your available working capital. Of course, if you have industry experience, or marketing and sales experience, or some other facts that might lessen the need to spend your working capital, this would support a lesser amount. Do your analysis carefully.
Tip #7 Read the Contract!
Ok, yes you not only have to READ the Franchise Documents but need to UNDERSTAND basically your worst case scenario, and know that going in. What happens if your money runs out and you do have to or need to close, what are your options…do you have the right to close; do you have to try and sell it first for a period of time; are there specific conditions to closing or selling; are you on the hook for any monetary penalties by closing; will the franchisor terminate the balance of the term of the franchise agreement….these are the important things you need to know, so look for those answers, and if you don’t see them ask the franchisor to point out in the franchise contracts those answers. If the contract is silent on closing or going out of business, it might be that you can be held liable for the remaining term of the franchise agreement, or perhaps some minimum monthly fees for many years. Find Out! Franchisees that know and understand their exit options GOING IN to the arrangement, do much better!
For more detailed info on any of the Practical Tips you have read, or for a detailed consultation about any other Franchise topic, call 949-415-2677.