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Buying a Franchise

On Behalf of | Feb 17, 2011 | Firm News

Instead of starting a new business from scratch, you may want to consider buying an existing business or, alternatively, starting or buying a franchise.  If you are someone who wants a turnkey system for operating a business that does not involve much individuality or creativity, a franchise may be just for you!  You have to be able to follow the franchisor’s rules for operating the business.  In other words, you have to have a personality that will allow you to stay “within the lines,” i.e., operate within well-defined parameters established by someone else.

You also have to be willing to work hard, make personal sacrifices and take financial risks.  You may need to be willing and able to manage employees or instead purchase a franchise that permits you to be on your own.

Next, you need to understand which franchises are hot and which are not and why.  Just as you would when starting or buying a new business, do your research first.  Start with national business magazines to understand macro economic and financial trends, then dig into industry or trade publications as you narrow your search.  SUBWAY is the hottest franchise nationally, but is there room for another one in the area in which you live and want to work? You also should understand local economic conditions and trends. If a particular market is already saturated with the franchise you are investigating, you may need to adjust your goals, objectives and thinking.   Understanding local conditions – community development plans, regulations and permitting/zoning – is critical to your decision-matrix.

Once you determine that franchising will work for you and you comprehend current national and local trends, you can then start researching the franchise that may be right for you.  Some people think you don’t need to have a passion or interest in the business you intend to franchise. I disagree.  To be successful at any business venture (or any career or activity for that matter), you need to envision yourself doing it 24/7 and enjoy what you do.  This will help you navigate tough times.  You also need to be honest with yourself – do you have the skill and temperament required to run the particular franchise?  If you know what you want, have set your goals and honestly assessed your skills and believe that franchising is for you, it’s time to pick two or three franchises to pursue.

Start with www.franchise.org, which has a wealth of information on franchising and franchisors.  I always recommend that you carefully read the franchisor’s offering circular (known as the Franchise Disclosure Document, particularly Item 19 which deals with financial performance) and marketing materials to begin your investigation in earnest.  You should interview franchisees in other jurisdictions and with differing success levels, so you can assess the risks more accurately.  If the franchisees cannot talk to you (i.e., due to confidentiality obligations), get the franchisor’s written permission to speak with current, as well as former, franchisees.  If a franchisee terminated his or her arrangement or was terminated by the franchisor, find out why.

Have your attorney and CPA help you narrow down your choices.  You probably should establish the amount you can afford to pay to start or purchase the franchise and where you are looking to locate.  The greater flexibility you have in location, the more choices you will have in franchises.  If you are buying an existing franchise and the franchise is a restaurant or other retail business dependent on location and traffic, visit existing locations in person several times at different times of day to observe first hand how the business appears to be doing at a particular location.  Have your CPA look at the seller’s financial statements and ask tough questions of the seller or franchisor for you.  Have your lawyer review the FDD and franchise agreement to determine if there are any hidden landmines.  Bottom line – once you do your diligence and planning and have satisfied yourself with your choice of franchise, go for it!  We are here to help if you need assistance!


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