Buying a Franchise

Many people who want to start their own business rush out and get a franchise believing that it is the best way to establish a tried and true business of their own with little risk. However, it is important to note that a franchise is not so much a business but a way of doing business.

Franchises use one type of marketing concept to sell products or services. A relationship must be built up between the franchisee, who is the one who is interacting with the customers and the franchisor, who originated the business in the first place. The franchisee has to follow the rules established by the franchisor when it comes to setting prices, marketing, supplies and even employment practices.

The way that a franchise works is that the franchisor issues a license to the franchisee for a business concept that has already been tested out by the franchisor. Because the franchisee is running the business carrying the name and brand of the franchisor, they have to run it according to the rules of the franchise. This includes everything from marketing to business plans. The license for the franchise is for a certain number of years and can be revoked if the franchisee does not live up to the agreement. The attraction for the franchisee is that all of the difficult aspects of the business have been ironed out before he or she steps in.

A franchisor can become very wealthy by selling their business plan concept as they take in a portion of the profits of the business. Selling franchises of a business allows it to expand on the labor and money of the franchisees. Many franchisors have made their fortune this way, notably, the fast food chain, McDonald’s as 75 percent of their stores are owned by franchisees. A successful franchisor will carefully screen the franchisees to make sure that they are suitable candidates to run the business.

Many franchisees feel that buying a franchise is not a gamble – this is not true. Many franchises fail because of location or poor management. In addition, the franchisee never owns the business, they simply lease it from the franchisor. Many people feel that buying a franchise is similar to buying a job. On top of that, if there is an economic downturn, the franchisee will still have to pay the same franchise fees to the franchisor, even though their profits may have dropped.

It can be difficult to judge whether or not a franchise is a good or bad investment. If the business does not pan out as you hoped, can you sell it to someone else or do you have to sell it back to the franchisor and take a huge loss.

The trick to buying a franchise is to find the right franchise opportunity.

Researching Franchises

One way that you can take a look at franchises is to go to trade shows. These are usually offered to showcase franchises and give you an opportunity to see the franchise options that are open to you. You can go through the trade show very quickly and gather up information that you can study at a later date to figure out which of the options is best for you. When you are thinking about investing in a franchise, be sure you find out the following:

• What type of profit margin can you expect in the franchise?
• How much are the franchise fees and how often do you have to pay them?
• Does the franchisor offer support and training?
• What type of reputation does the franchise have?
• What does the future look like for the franchise? Can you still see the products or services in demand 10 years from now?
• What sort of demand is there for the products and services offered by the franchise?

Be sure to talk to other franchisees to see what type of experience they have had with the franchisor.

Franchising is heavily regulated by the federal government. Before you decide upon a franchise, you should talk to an attorney who can give you legal advice regarding how the government protects the franchisor and the franchisee.

Buying an Established Business

When you buy an established business, you are often walking into what is known as a turnkey operation. This means that the business is established, up and running and all you have to do is sign the papers, establish ownership and pick up the key to the business and you are set to go. You should give careful consideration to the business for sale before you decide to buy.

You need to find out that the business is solvent and has a good reputation before you seek to sink any money into an established business. How long has the current owner had the business? What type of reputation does it enjoy in the community? Why is the owner selling? Stay away from businesses that have changed hands repeatedly in the past as they are usually what is known as white elephants and you will end up losing money.

Take a look at the other businesses in the area that compete with the one that you are thinking of buying. How dense is the competition? If there are more businesses than customers, this usually signifies a downturn in the market.

Other questions you need ask include:

• Has there been a demographics change that has adversely affected the business?
• Are there new business products or services that will be offered by the business?
• Is there any new legislation or ordinances that may negatively impact the business?
• The business owner will usually sell you the current stock at a separate price. In some cases, in true turnkey fashion, the current stock will be part of the deal and included on a bill of sale. If you are not interested in the stock, you can negotiate another price for the business alone and allow the business owner to sell the stock to someone else.

Make sure that you use an attorney to assist you with the sale who is knowledgeable with regard to business debt. You should get free and clear title to the business, without liens so that you do not, unknowingly, take on any business debt.

Have an attorney draw up the contract for the sale of the business and make sure that you understand the implications. If the business owner has their attorney draw up the contract, take it to your own attorney for verification. In addition to the contract, you should look for the following:

• Three years of financial statements certified by a public accountant.
• Financial statement of the business including all assets and liabilities.
• Details regarding the employees of the business, their salaries, union contracts (if applicable), and benefits.
• Two years of tax statements. You will want the tax for the business prorated to the date of the sale.
• A title policy for the land owned by the business and a clause in the contract that protects you against fraud.