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Franchises - What To Consider
By Richard Parker, President of The Business
For Sale Buyer Resource Center™ and author of
the most widely used reference resource and
strategy guide for buying a business for sale –
How To Buy A Good Business At A Great Price©
The franchise concept is an incredible one.
Gather all of the ingredients specific to a
business and formulate a recipe that can be
duplicated over and over again by anybody. When
someone refers to a "turn key" operation, the
most likely example is a properly orchestrated
franchise. Although the recipe has been set, it
still requires the input and management of the
right owner to ensure an individual location is
successful.
The Bad News:
A franchise is by no means a guarantee of
success. Plus, a new franchise is basically a
start up with some advantages. Master
Franchisers will do a load of demographic and
marketing studies evaluating potential customer
base, drive-by traffic, etc., but the only thing
that they cannot do is guarantee your success.
They usually have very slick salespeople and
presentation materials, but so what? It's really
just an educated guess about what "may" happen.
When all is said and done, new franchises are,
to a certain extent, a "build it and pray they
will come" strategy. Plus, a new franchise can
sometimes mean waiting a year or more for it to
be launched.
The Good News:
Franchises can be a good place to begin your
entrepreneurial career. If you want to greatly
improve your chances of success then buy a
franchise resale. Take advantage of one that's
already established and successful. This way,
you combine the best of both worlds: a franchise
concept and the track record of an existing
business. It just makes more sense.
While it is not always easy to locate resales,
there are plenty of them around. The best way to
find one is to address your search on two
levels: call the Master Franchisers and ask if
they can provide you with a resale listing in
your area. Second, approach any current owner
and ask him/her if they know of any that may be
for sale. They will probably tell you that
theirs is for sale "for the right" price. In
either case, you will get leads to pursue. Of
course, you can always go through regular
channels such as your local paper, business
brokers and online listings.
The other good part of buying an existing
franchise is that you can implement all of the
same strategies for identifying, negotiating and
financing the purchase as you would when buying
an existing non-franchised business. As such,
it's wise for you to get hold of a good strategy
guide for buying an existing business.
The Investigation Advantage With A
Franchise
Probably the most attractive feature of
buying a franchise from the buyer's point of
view is that you can investigate any franchise
much easier than an existing non-franchised
business. The reason for this is because you
will be able to look at other franchises under
the same banner. You can speak with other
franchisees in your area and they will be a
wealth of information for you.
There is also a disadvantage when
investigating and conducting Due Diligence on a
franchise as you have to do it on two fronts.
You have to check out the business itself, of
course, but of equal or greater importance you
have to evaluate the Master Franchiser to be
sure that they will deliver everything they are
supposed to do.
Your Partner is Your Competitor
The Master Franchiser's agenda is to open up
as many locations as possible. While they may
all say that they will not dilute the market,
rest assured that unless they are contractually
obligated to do otherwise they will keep
compacting the territory. As they open more and
more locations you may wind up competing with
your own brand. Once a customer of yours finds
another location to be more convenient - unless
you have a rock solid relationship with that
individual -you will lose their business.
How to Make Money in Franchising
The best way to accumulate wealth in
franchising is to keep opening up or buying
other locations. If you can, stick with one
banner or within an affiliated group of
companies. This way, your leverage with the
Master Franchiser increases and you can also
focus on running one particular type of
business. You can't dance at all of the
weddings, so opening up new locations too
quickly can cause growth problems. However, as
soon as you get the first one on track, look to
acquire another one.
Franchise Contracts
Each state has different laws related to
franchises that are usually quite intricate.
Additionally, the agreements between the
franchisee and franchiser differ between
companies and many contain clauses that you
would never even think exist. As an example, if
a franchisee wants to sell their business, most
often the franchiser has the first right to buy
the business. The reasoning is that they want to
be sure that the market doesn't have too many
resales available (it hurts them when trying to
sell new ones if potentials buyers see too many
other franchisees selling). Secondly, they want
to protect themselves if they don't feel the
potential buyer is right.
Hire an attorney who specializes in franchise
law, and before you take a second step with any
resale franchise, get a copy of the contract
between the franchisee and franchiser to
properly evaluate what you will be faced with
along the road.
In Summary
Franchises can be ideal for many people. If
you want to really improve your success rate,
then buy an existing location. It will provide
you with all of the benefits of a franchise
along with the added security of historical data
and a proven track record.
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