Is Buying a Franchise Wise?

You may think this means that your risk is limited because the broker weeds out poor investments. In fact, some brokers represent any franchisor willing to pay them a commission for a sale. A broker who does that might direct you to a franchisor that is failing or doesn’t have a strong history. Exhibitors may offer you incentives to attend a promotional meeting to discuss the franchise in detail. These meetings can be another source of information and give you a chance to raise questions, but they may also expose you to high-pressure sales tactics. Be prepared to walk away from any franchise opportunity — and promotion — that does not fit your needs.

If he or she does, consider whether the broker is suggesting a higher priced franchise in order to earn a larger commission. It’s always a good idea to visit franchised outlets in your area and talk to the owners about their experience with particular franchisors. Franchisors may impose design or appearance standards to ensure a uniform look among their outlets. Some franchisors require periodic renovations or design changes; complying with these requirements may increase your costs.

Make sure your business is ready to franchise

Still, their attorneys may want the brand to approach the issue of financial disclosure with absolute, extreme caution. There are some important clues you can track down before deciding if owning a given franchise location will give you the financial payout you’re hoping for. As with EBITDA, multiples of three to four times cash flow are a reasonable basis for valuation. Managers tend to focus on the P&L, but as a guide to the health of a business the cash flow statement is crucial. In some situations the P&L can make things look rosier than they are. It’s highly unlikely that everything could be sold for that amount.

Before you decide to use a broker, consider whether you need a broker’s services or could get enough information by shopping online or reading trade magazines. Many franchisors retain the right to approve sites for their outlets, and may not approve a site you select. Some franchisors conduct extensive site studies as part of the approval process and a site they approve may be more likely to attract customers. Find legal resources and guidance to understand your business responsibilities and comply with the law. We enforce federal competition and consumer protection laws that prevent anticompetitive, deceptive, and unfair business practices. You need to acquire the skills to manage the business, control expenses, and reduce waste.

As with any business, the value of a franchise is a function of risk and return. A franchised business may seem to carry little risk because its brand is established and the franchisor provides administrative support, including marketing programs, accounting systems, operating manuals and training. The franchisor also may pass along volume purchasing discounts from suppliers to its franchisees.

EXPERIENCE AS FRANCHISORS AND FRANCHISE DEVELOPMENT ADVISORS

The International Franchise Association suggests nine questions before buying a franchise. These questions focus on the costs of operating the franchise (both start-up and ongoing), the expected level of commitment from franchise owners , and the franchise’s financial state and track record with other owners. With that in mind, some franchises, such as Lawn Doctor , will finance franchise fees, start-up costs, inventories, and equipment to help their franchisees get started. As a first step, you should derive cash flow estimates for a «mature» franchise — one that is at least two to three years old. This will allow you to measure the long-term returns offered by the franchise, as many businesses are not very profitable in their first year or two of operations.

Generally, book value is going to result in a very low figure because it does not reflect the valuation of your franchise business as a going concern—i.e., its ability to generate revenue and income. For that reason, book value is of academic interest to an official appraiser rather than a real-world estimate of value. SBA loans have competitive interest rates and long repayment terms. There are the very popular SBA 7 loans, which provide business owners with working capital to make purchases they need.

What to look for in your franchise agreement

Talk to the franchisor and current franchisees to get answers to your questions. These kinds of restrictions may limit your ability to exercise your own business judgment in operating your outlet. Some portion of the advertising fees may be allocated to national advertising or to attract new franchise owners, rather than to promote your outlet. Your initial franchise fee will typically range from tens of thousands of dollars to several hundred thousand dollars and may be non-refundable.

Use this guide to learn more about the difference between an LLC vs. an S corporation. If you are not prepared to move to where the next store is slated to open you will likely wait a long time. Running a credit report before the lender does gives the franchisee a chance to correct any inaccuracies.

Additionally, Item 17 describes what you must do to get the franchisor’s approval if you want to sell your franchise. Lastly, it states whether you have the right to go to court if you have a dispute with the franchisor, or must use arbitration instead. Item 17 also explains what your obligations would be to the franchisor after termination. The restrictions may also prevent you from operating a new business within a specified distance of any other outlets of the franchise. Some franchise brokers may claim to be able to match you with “the perfect opportunity” because they represent a wide range of business sellers.

Moreover, it is making your job easier by telling you up front what kind of financial results some of the units in their system are achieving. Obviously, those last few reasons should be of some concern to you as a prospective franchisee, and you should add those questions to your list for further discussion with the franchisor if it does not provide an FPR. You’ve done your research, and have narrowed it down to a short list of companies that excite you personally, are profitable, and have management teams you are willing to bank on. ✅ Get the guidance and support you need every step of the way (including funding 💵) from an experienced franchise broker at no cost to you. Similarly, taxes are a product of the owner’s financial circumstances and should therefore be estimated based on the buyer’s tax burden.

Additionally, the franchisee must pay professional fees to get started. The unfortunate part is that royalty fees are pretty standard in the franchise world. Subtract payroll, food costs, and taxes—in addition to these royalties—and it’s easy to see why being a franchisee may not entail the life of luxury you imagined.

• We have 200+ employees already on staff — and we actually own and operate franchises — allowing us to provide these services at a fraction of the cost of attempting to do this process on your own.
• Personal assets include your possessions, such as the current market value of your home and automobiles, your furniture, electronic equipment, jewelry and any other personal items that have monetary value.
• Liquid assets are those that can be turned into cash immediately.

Are there certain businesses that attract a clientele that would be your ideal customer? Consider potential opportunities in these neighborhoods or areas. Of course, you’ll want to consider competition, too — being too close could work to your disadvantage. Business term loans have terms of about three to five years and require monthly repayments. This type of loan enables you to get capital for the purchase of gear you may need to get your store up and running. This could be for something as large as a commercial oven, or as small as a ballet barre.

But a large number of failed franchisees may have implications for the franchisor’s support system, business model, or selection process. If that last one is systemic, it points to problems with quality control (too many dummies spoil the broth!) and future failures within the franchise system — maybe even your own. So be careful if every franchisee you speak with sounds as if they took one too many punches to the head. Be sure you contact a large enough sample to give you a good cross-section of results. For example, speak to newer franchisees as well as those who are better established.

We’re reimagining what it means to work, and doing so in profound ways. At ADP, we say that we’re Always Designing for People, starting with our own. Small, midsized or large, your business has unique needs, from technology to support and everything in between. See how we help organizations like yours with a wider range of payroll and HR options than any other provider. These are important, logistical questions whose answers can ultimately determine whether someone makes the decision to buy a franchise or not.

It’s important to understand the numerous common terms used in franchising. Also, be aware that each franchise sets its own fee structure which will be clearly defined in Item 5 of a Franchise Disclosure Document . Item 7 of the FDD will include detailed initial investment costs of any franchise. At times, that may mean wearing several different occupational hats at any point.

A franchise investment requires a personal assessment of your objectives, financial situation, skills, goals, and many other factors. Before making any investment decision, you need to consider whether this information is appropriate to your situation and needs. Franchise Business Review provides data-driven solutions to help franchise companies improve and grow.

MDD International and each of its member firms are legally separate and independent entities. MDD International does not itself engage in the provision of debits and credits to clients. With the busiest season of the year for retail sales upon us, you are no doubt wondering what to buy for that special someone. If you’re reading this blog – and I have every reason to believe you are –…

If the franchisor has existing franchisees, you should speak to as many of them as you reasonably can. Let’s break down the elements of EBITDA and why they are excluded. Depreciation and amortization are non-cash entries that will not impact your cash flow. We omit taxes from our analysis because most of your alternative investments are subject to tax in any event — so this allows us to better compare apples to apples.