Business Pixelate

Archive for the ‘Business Broker Franchise’ Category

As someone who has been in franchising for 35 years I’ve seen a number of changes especially in the area of franchise structures. These structures include area developers; master franchisors, regional developers, development agents and the old reliable sub-franchisor (I prefer to use that term with a hyphen) come to mind.  Often times these titles are used without regard to their true meaning. Usually it’s a prospective franchisee that becomes confused and doesn’t fully understand the correct definition until they speak with their franchise attorney.

I hope to put one of the most misunderstood terms to bed once and for all. That term is sub-franchisor and its subset sub-franchisee. According to the FTC the definition of a sub-franchisor is as follows:

A “subfranchisor” is a person “who functions as a franchisor;” by use of the qualifying phrases “grants a franchise” and “participates in the franchise relationship,” the amended Rule clarifies that in order to be considered a subfranchisor, a party must have – as a franchisor has – (1) the authority to enter into a franchise agreement (or another agreement relating to the franchise), and (2) as a result of entering into such an agreement, that party is obligated to perform after the purchase of the franchise is consummated.

Franchisor means any person who grants a franchise and participates in the franchise relationship. Unless otherwise stated, it includes subfranchisors. For purposes of this definition, a “subfranchisor”means a person who functions as a franchisor by engaging in both pre-sale activities and post-sale performance.

The FTC explanation continues in part:

The role of a subfranchisor is materially different from that of a broker, for example, because a broker typically is not a party to the franchise agreement and does not have post-sale contractual obligations to franchisees.

Why is the term so often misunderstood? I believe because people sometimes confuse the contractual obligations an entity has with certain duties they perform. Although an area or regional developer may have certain responsibilities from a franchise sales, training and support standpoint most of these entities are not a party to the franchise agreement. Rather franchisees they recruit and train enter the franchise agreement with the franchisor.

So where does sub-franchising take place? In almost all cases when a franchisor grants licensing rights to someone in another country and that licensee enters into franchise agreements with franchisees in their own country or territory.

I hope this clears this one up once and for.

It seems only natural for someone starting a company to wander about how much they can make from that venture. When it comes to business, not much can be worse than the realization that all the hard work and sacrifice that goes into building a business is not producing the desired financial returns.

“How much can I make?” This a very simple questions with a very complicated answer, at least when it comes to buying a franchise.

For someone who is shopping for a franchise, the answer to the question above brings some good and bad news. The good news is that an ever growing number of franchises offer some sort of an earnings claim that should enable the buyer to get a general idea of a franchisors’ average unit performance.

Plus, the franchise candidate has complete access to all the current franchisees in the system and has the ability to directly interview them about their financials. The bad news is that, despite all the safety nets build into the idea of franchising, the candidate won’t be able to completely remove significant element of risk from the transaction. Every concept that has been franchising for more than 10 years has had some failures in their system.

The reality of the situation is that franchising is a multi-billion dollar industry and has made many owners very wealthy. According to some surveys, in 2000, the median gross annual income (before taxes) of a franchise owner was $75,000 to $124,000 – with 30% earning over 150k per year. The industry continues to grow in size and popularity. Franchising is not for everyone; but, in general, it will continue to produce steady results for people who invest serious time into their franchise selection process.

How much can a prospective franchisee make will depend on many factors. Location, debt load, startup expenses, labor costs and the systems that a franchise uses to manage its business play a major role in each unit’s profitability. In order to achieve particular income goals a candidate will need to consider options such as break even periods, cash reserves, marketing, just to name a few. Plus, they might come to a conclusion that they need to operate multiple units and/or have creative location options.

There are thousands of franchise options out there. In order to find a good fit, I recommend looking at various franchise companies, 2-3 businesses at a time. Creation of a cash flow model, business plan, interviews of current and former franchisees and visits to the company headquarters are all necessary steps in the process. If a particular industry has been selected, I would advise to start seriously investigating other franchise options in the same industry. In addition to that, I would recommend being very conservative with the financial assumptions about the business. Creating a contingency fund is very important. Keep in mind that the majority of new businesses fail because they run out of cash.

The process of buying a franchise takes time. It can take from three months to a year to narrow down all the choices and perform all due diligence tasks. Organization and thoroughness, not speed and overzealousness, are the franchisee candidates’ best friend.

In the end, in order to make the most out of franchise business, the candidates have to believe in themselves. Naturally, not every franchise is successful and makes its owners money. The key to finding out how much money can be made is to invest the time to understand the details.

For more on finding the right franchise go to: http://franchise-opportunities-search.com

Check out before you buy is the road to purchasing a franchise. If this is done first, then there will be no surprises or regrets later. Any good businessman or woman would find out as much about a franchise and its operation before purchase as humanly possible. Not all franchises operate the same and each has its mandatory rules that are part of any purchase contract. The contract other than stating how the franchise will be paid for and when, will also lay out in detail what the franchiser has agreed to do and what the buyer must do after becoming the owner.

These are the elements that should be looked into before purchase of a franchise. Examples are: Who can you buy supplies from and is there a requirement to pay so much a month for advertising controlled by the franchiser.

Are there mandatory meetings and training for the owner or his staff. Each major franchise has different elements like this in the contract they make with the buyer. These are the details that should be looked into before purchase. How do you do this and where are good places to seek the answers?

Other owners

Owners of similar franchises that you are considering are great sources of information when you can find one that will speak with you. If you get them talking try to find out what they like and what they do not like about running the franchise they own. Do they have any suggestions for you as to how to negotiate the purchase or is it cut and dried as far as the franchiser is concerned. Why did they end up picking this franchise out all of them that are available?

Would they do it again?

Did they buy from a previous owner or direct from the franchise company. This is an important question, as their answers will shed light on detail that could be valuable to you in your discussions with an owner or the franchise company.

Find out about the help that they really got from the franchise when they first started. What did they think of it?

If they are successful, what do they contribute their success too. Do they just have a terrific location or are they just great business people. This answer could help a prospective owner evaluate what they could do if they owned a franchise.

Franchise for direct answers

Most people who buy a franchise get most of their answers direct from the franchise people. Major franchises have a very detailed plan they go through when talking with a potential owner. They have very specific criteria that the possible owner must meet in order to continue the discussion. They have minimum financial requirements that the buyer must meet or they will not go further in the discussion. If you meet their criteria then that is a plus, as they know what is needed for a new owner to be successful. It also means that they have a live one on the line. Remember this is a sales situation and the details will be presented in the best possible light they can use. Your part of this discussion should be in two parts. Listen very carefully to what they say and ask every question you can think of. Find out in great detail what they provide after you become an owner. Find out what is required of you after you make the purchase. Find out about current help as well as future help in running the franchise. There really should be no question that they cannot give a detailed answer too since this is their area of expertise.

In this situation there are no dumb questions, there are just questions that you do not know the answers too. The worst mistake you can make is to not ask and assume you know the answer. Your assumption could be absolutely wrong and you need to find that out before the purchase. Ask about the success stats they have on new owners and what caused the failures that have occurred. Major franchises have a very high success ratio with new owners. Lesser franchises may have a very spotty record in this area. You need to know before you buy.

Business brokers as a source

Reputable business brokers are a great source for getting good information as will as finding solid businesses that are for sale. An experienced broker in this area will have a sixth sense about deals that he has listed. They will know the real reason for the sale, which may not be what is given at first. They also will have inside knowledge about franchises and how they operate. Pick their brain and let them earned your business.

The Internet source

With today’s Internet, there is very little that a serous searcher cannot find out if they are willing to spend the time and effort on the Net. You can read all sorts of sites that supposedly will tell the inside information about franchises. You can find success stories and how to do things on the Net. This is one source that should be checked out thoroughly by a potential buyer. One thing you will find when looking on the Net, is that you never knew there were so many businesses that a person could consider as a franchise buyer. It does not matter what your interest are, there is a franchise that will use that interest to become a business.

You will notice that these little known franchises have low starting purchase prices. If there is one that strikes your fancy, make sure you ask what you get for the money that they want you to pay out. If it amounts to just a business plan, then it may not be worth the expense. This is the reason to ask lots of questions.The questions will ferret out the sweetheart deals and the potential winners.

Conclusions

Due diligence is a necessity. When thinking of buying a business, this should be the first step toward a possible purchase. Ask questions; seek out solid information from sources that you know to be reliable. Do your homework, as this is the only way to make sure that you do not become the proud owner of a white elephant. Use all of the sources listed here and any you can think of or find while doing your research. Quality information allows the buyer to make superior decisions.A serious buyer of a franchise should be willing to spend the time and effort to check out the deal. This will do one of two things, make the buyer run away like he is on fire or make buyer ready to do the deal without any reservations. The latter is always preferable when the sale has been put to bed.

The check out may lead you to consider a different type of franchise than the one you first thought would be for you. This must be a match to work out well for the buyer, both financially and emotionally. A thorough study of the franchise and what it entails to own one is the only way to make a decision that you can live with. Check first before you write the check.