When Shopping for a Franchise

August 8, 2018

When Shopping for a Franchise

Looking for an opportunity to go into business for yourself? Many people pursuing this dream consider purchasing a franchise with a proven business model. The idea behind franchising is a business owner has developed something that has been fine-tuned over the course of time, resulting in an operation with built-in systems that can be duplicated by others if they follow the franchisor’s instructions. At least that’s the intention; what could possibly go wrong?

Here are a few helpful hints to guide you through the process.

  1. Trust the process but maintain a level of skepticism. There are so many choices of franchise businesses to choose from. In reality, some are perfectly designed for a franchise while others are the result of a successful business owner believing the business is perfectly designed for a franchise. Understand the business operation before committing to purchase. Ask questions, attend Discovery Day, visit other franchises in your area if possible, and reach out to other franchise owners to get feedback on their experiences. Anticipate operating by the manual but make sure to add your personal touch to make the business yours.
  1. Read and understand your Franchise Disclosure Document. Make sure you know what you are entering into, what is required of the franchisor and what is required of you. Most franchises will require an up-front fee to purchase a territory, and will require ongoing payments in the form of royalties, advertising cooperatives, computer and technical support, etc. Find out if capital improvements are required of franchisees, and further if one is anticipated in the short-term. If things go as planned you might consider expanding your territory, so find out what it costs to accomplish this; assuming there is a franchise available in your desired territory the cost of said territory is frequently discounted. Know how long your franchise agreement is in force, and how much it will cost you to extend. And read the franchisor’s financial statements; you want your franchisor to be there well into the future to support your endeavor.
  1. Choose a franchise in an industry that excites you. Business is hard enough in today’s economic environment. Doesn’t it make sense to go into something where you look forward to going into work each day? And do your homework – learn about the franchise, the business model, the industry in which it operates and the potential for success.
  1. Understand your demographics. Identify your target market and make sure there are enough potential patrons to go after. Reach out to your potential patrons where they are, don’t expect them to line up the minute you unlock the front door. Create an advertising campaign with purpose, monitor its success, continue doing what works and modify or replace those ideas that don’t seem to work. Keep in mind advertising may be effective instantaneously, in a week’s time, a month, a year, or not at all, so give it a chance before making any quick decisions.
  1. Understand your labor pool. If you are looking at a franchise that requires employees with specific skills, make sure those people will be available to you for recruiting purposes. If the franchise is designed to be owner operated with few or no employees, consider the amount of time you will have available to operate the business, and consider how you might feel a year or two out if you continue to put in the time.
  1. Use forecasts and develop meaningful budgets. You are going into business for a reason, and that reason is to become profitable. Work with the franchisor to get an understanding of the revenue structure of the business model and the operating expenses you will incur. In 40 years, I’ve never seen a budget or a forecast that didn’t work; something will always be modified to make sure you arrive at favorable results. If necessary, go overly conservative by understating revenues and overstating expenses to come up with a worst-case scenario. Then build in a contingency factor on the expense side (learn from Murphy’s Law – and remember, Murphy was an optimist!). Make sure your analysis includes a cash flow model; without cash, your business won’t survive.
  1. Consider all potential sources of financing your acquisition. The most common source of seed money is from business loans, personal assets, or a combination of the two. One lesser known source of funding is utilizing ROBS (Rollovers for Business Start-ups), providing access to funds earmarked for retirement. There are many advantages to using this method of funding your business, but this comes with many specific requirements and tax laws to which you must adhere. Learn the facts about this opportunity to make sure it is right for your personal situation.
  1. Most importantly, utilize experienced professionals to help you in the process. There is much to know, there is much to learn. You don’t always know what you don’t know, and frequently you don’t know what you do know. Draw on the knowledge and experience of your trusted advisors, including your attorneys, accountants, bankers, financial advisors, insurance professionals and others who can offer a different perspective or an alternative solution to a problem. Don’t make cost the basis of hiring a professional. In the long run. The cost of professional support will pale in comparison to the cost of your business acquisition, so investing in a professional’s experience at a few dollars more is much less costly to utilizing a lower priced professional (or no professional for that matter) at the risk of losing the funds you invest in your business.

Herbein + Company has extensive experience in servicing both franchisors and franchisees and has a department dedicated to servicing this market niche. We are also experienced in the utilization of ROBS as a funding mechanism for your business acquisition. Call us to learn more or contact us at info@herbein.com