Updated January 2022
Buying a franchise is a major decision. It’s right up there with buying a house and even deciding to get married due to the long-term commitment and impact it will have on you, your lifestyle and your family. As you are thinking about what franchise to buy and in fact, if you should buy one, please keep in mind these three things.
- Buying a franchise means a commitment of at least 5 years and you will be bound by a contract called a franchise agreement.
- Buying a franchise is a bit like leasing a rental property. You will be given the right to operate the business for the term of the agreement but once the agreement ends, you do not have the right to operate the business anymore. Think of it like leasing or renting the business for 5 or 10 years (or the term of the franchise agreement). This has implications for the returns you need in the time frame of the franchise agreement.
- Determining if the franchise will give you the returns you need is not easy and you will need solid advice PLUS you will need to do your own homework. Doing your homework is called due diligence (see resources at the end of this article), and you might hear this term used a lot when researching your franchise.
Please take notice of this term and understand what’s involved to really make sure you are making the best decision for you. Your future depends on you doing your homework.
Research undertaken by the Franchise Centre at Griffith University on due diligence found that over a third of current and former franchisees experienced regret about the amount and depth of their due diligence.
The areas that people believe they should have researched more thoroughly included such things as financing, price paid for the business, cash flow forecasting, checking inventories and understanding leases.
Have you heard the term before that when you buy a property, you make your money when your purchase rather than when you sell? What this means is that if you buy at a good price (low price) then you have more to gain when you decide to sell and this increases your wealth.
This can be the same in franchising. The first thing you need to do is avoid paying too much, or in other words, buying a franchise that will not give you the returns you need given the level of investment (ie what it costs you).
To break this down, what this means is that your franchise provides enough revenue to pay the business daily operational expenses, pay you as the owner of the business a reasonable return plus pays off the loans you have taken to buy the business.
And because your franchise agreement may only go for 5 years (and with usually the option to extend for another 5 years), it is wise to pay off your loans in the first 5 years. Then from years 6-10, you have more opportunity to build your nest egg as you don’t have the loan to pay off and you can save or invest this money.
We have all seen the impacts of paying too much and not being able to make a reasonable living. You do not want to be in this position.
Do your research
OK so I’ve introduced some important concepts, but I can hear you saying: “I don’t know how to do this”. You are not alone. Most people looking to buy a franchise are in exactly the same position.
This is where business and accounting advice is very important. You need to find someone to guide you through this.
So how do you go about identifying someone? Here are three steps to help you.
- Do a google search to find franchise business advisors and accounting professionals. You don’t have to find a local adviser as advice can be provided via Zoom, phone or email. The most important thing is to find someone with extensive experience in franchise business advice. Franchising is a very specialised area so please don’t just use anyone. They must be experienced in franchising!
- Ask what experience they have in franchising. How many clients have they had over the past 12 months looking to buy a franchise? What percentage of clients are involved in franchising? Also, ask for a reference from a franchisee.
- Ask about the fees. Is it fixed for the advice or an hourly rate? What are their payment terms? Ask who will be appointed to do the work. Will it be delegated to someone else or to an overseas virtual team?
One last thing before I sign off. When your advisor gives her/his advice, you need to listen very carefully. I hear of too many people who get advice and then ignore it. Please, please listen and think about it. You and your family’s future is too important not to.
Thinking of buying a franchise business? Do you want to make the wisest and safest decision before entering a franchise agreement? Then our Franchise Opportunity Assessment and Advice service might be for you.
You can also have a 15 minute complimentary call if you have specific questions. Book online here
Further Resources to assist you in your due diligence
To help you in your Due Diligence, FranchiseED also has online educational resources: