How to buy a franchise business | The process of selection and Evaluation

The question shouldn’t be, “How to buy a franchise business”, it should be, “what is the right franchise for me to invest in, and how will I fund my new franchise business?”

The term buy is associated with spending money, a onetime transaction, the money is spent here and now and therefore gone.

The term invest is associated with growth, personal, professional and financial future. Investing in the right franchise is about investing in all the above, personal, professional, and financial future.

The process of selection and evaluation is not a complicated process with the right resources. Here is a detailed outline of what this looks like and what you will want to focus on:

Does the franchisor have a history of helping their franchisees achieve their desired goals, allowing them to enjoy the benefits of franchising while avoiding the need to learn through trial and error?

There is no fool proof method of finding the perfect franchise. However, if you follow these guidelines, you have a higher probability of finding one that is right for you. This is a process of mutual evaluation, one could conclude that if both parties are satisfied, it is a match. However, because the prospective franchisee is usually less informed, the franchisor could dominate the process and convince the candidate it is a fit if they are just trying to grow their brand, so you want to be educated about franchising before trying to contact a franchise, even if you think it is a fail proof business.

Top franchisors’ will award you a franchise only if there is a match based on skills and financial parameters. However, franchisors’ are eager to expand their brand as fast as possible, so it is important to be cautious. Less ethical franchisors’ may attempt to prey on unaware prospective franchise candidates.

Top franchisors’ and less experienced franchisors’ use marketing techniques to create an emotional sense of wanting to be a part of their family, some of these methods include, brochures showing happy franchisees, with a simple and easy to duplicate system, and ads that suggest owning their franchise is all you need to succeed as a business owner. The franchise development team is composed of professional sales people trained to get you to commit and sign the franchise agreement as soon as possible.

There are some legal requirements to protect prospective franchisees from misleading franchisors. For example, each franchisor must disclose all the information about its franchise in their FDD (Franchise Disclosure Document) and update it regularly. Under the Franchise Rule, which is enforced by the FTC (Federal Trade Commission), a prospective franchisee must receive the franchisor’s FDD and sign the receipt of the FDD at least 14 days before they can legally sign any contract or pay any money to the franchisor. However, it is still recommended doing your due diligence to validate what you read in the FDD.

To increase your chances of investing in a franchise that is right for you, there are some steps you can take that will enable you to acquire enough of the right information to make an informed decision you can feel confident in and good about.

Preparing to transition from employee to entrepreneur

First and possibly the most important step is an honest self-assessment of your character, skills and competences, family support and financial resources.

Second, market analysis for product or service viability, is there a seasonality to the business, are there special licenses or city, county, or state restrictions to the type of business, are there major business trends, new products or services that might disrupt the industry considered. It is important to understand the climate and competition in the areas of interest to you. Investigate value proposition, cost of startup, operations, average break even, structure and revenue streams, evaluate the competition, learn their strengths and weaknesses, analyze their performance and financial results.

Then reference and use the list of information to select a franchise based on the results. Be honest with yourself when putting down the criteria, it will not do you any good to overestimate your skills and abilities, the last thing you want to do is make a decision based on emotion, be sure you evaluate and validate the cost to start the business and run the business to a break even so you do not get in over your head financially. Most businesses fail due to being under capitalized.

Finally, update your resume with a cover letter explaining why you believe you would be a good business partner and have a high probability of success with their system based on your background and how it aligns with their most successful franchisees. This will show you have done your homework. If you are serious about this and really want the franchisor to take you seriously, you must present yourself as you would for an executive position with a large corporation. Franchisors’ receive hundreds of requests weekly, sometimes it can take time for them to get back to you, but if you through something together or make a general request, you may never hear from them.

Selecting of franchises to evaluate

Now that you have some guidelines to follow to help identify possible franchises, it is time to find some franchises that meet your requirements and are available. Pick a sufficient number of franchises to request more detailed information about. You will want to start with a list of 10 to 15, let’s assume, that out of 10-15 franchises, 3 or 4 did not reply to your request, one was short and unprofessional, and some did not match your criteria. You will end up with possibly three franchises that are of interest, match your requirements and communicate with you.

There are several ways to build a list of potential franchises. You can go to a book store and buy the franchise handbook or surf the internet, there are a number of franchise information portals that will give a list of most of the big franchises available along with some limited information about the franchise. One thing to keep in mind as you browse the net and the portals, these are sites designed to capture your information to pass on to franchise consultants and franchisors. This is not necessarily a bad thing, however you may be inundated with calls and emails from many consultants and franchisors.

Franchise consultants are a great resource, but you want to make sure the consultant you are working with will have your best interest in mind. Just like franchisors, there are great ones that will only award franchises to qualified candidates, there are consultants that will only present top franchises that are a match based on your criteria, and there are consultants that will present franchises that they know have aggressive sales staff and high placement fees.

Your consultant should not be asking you for a fee, the franchise will pay them if there is a placement and it does not cost any extra from the franchisor if you use a consultant. He or she should first take the time to get to know you, your background, family, lifestyle, current financial parameters and financial goals. They should not mention any specific franchise until after a formal consultation and obtaining a completed general franchise registration form.

Working with a good consultant can save you countless hours of research and the frustration of trying to connect with franchisors that do not respond because they have several new requests daily and they are going directly to candidates that have been pre-qualified and sent by a consultant and getting to general requests on their spare time. It will also save you from getting excited about a specific brand only to find out it is sold out or in not a match.

Franchise Evaluation and Validation

Franchise evaluation and validation sometimes called the discovery process is a process of mutual evaluation followed by validation of the information with franchisees. With the three franchisors’ left on the list, the goal is to narrow your focus to the one that has more of the core components to help you achieve success as a business owner. You should be able to narrow this down after 2 or three calls with each one, sometimes you will know after your first call if you want to have a second call or not. The franchisors’ will ask you to sign a non-disclosure agreement, memorandum of understanding or letter of intent before starting validation with other current or past franchisees.

What is in the FDD: The importance of validating this information.

Company: history, reputation, financials, litigation cases etc…

Franchise network: growth dynamics, KPIs, geography etc…

Competitiveness, business model, cost, revenue streams, supply chain etc…

Franchise terms and conditions: franchise fees, required investment, rights and obligations of both franchisor and franchisee etc…

After reviewing all the information the franchisor has shared in webinars, on calls and in the FDD, it is time to validate that information by contacting several current and past franchisees. It is important to pay attention to how you relate to each franchisee. If you find yourself strongly connecting with many successful franchisees, this could be a sign that this is a good fit. If you find yourself relating to the unhappy franchisees, it is a sign to end the process and look back at something else you dismissed earlier on to see if there was something you missed that may make it a better fit, or decide to stay employed.

Along with evaluating facts and figures, you want to pay close attention to their behavior, failing to answer your emails or calls, providing inconsistent information, pushing you to sign a franchisee agreement as soon as possible, should raise red flags. If the franchisor does not communicate well now, it may be worse after signing the franchise agreement.

The franchise agreement

After you complete validation if the franchise is awarded and you determine it is a fit, you proceed to negotiating terms and conditions of the franchise agreement. Most franchisors’ will not be willing to modify a contract based on individual terms and conditions. However, occasionally, there are some unique geographic, or demographics that would make the normal terms unfair to the new franchisee and the franchisor will make an amendment. Regardless, stay rational and be sure that the franchise agreement is acceptable to you and you fully understand what you are signing.

Legal documents are difficult for most people that are not educated in law to understand. It is quite reasonable to seek legal advice from a franchise attorney before signing a franchise agreement. A good franchise attorney is familiar with local, state, or international laws regarding franchises that may interfere with opening your business on time or at all. Also, they will help you understand clearly all rights and obligations of both parties, and the consequences of breaching the contract.

Signing the franchise agreement

Once the terms and conditions are acceptable to both parties, the franchise agreement is signed, you pay your initial franchise fee and you become a new franchise business owner. You will be expected to follow the franchisor’s procedures outlined in the franchise operations manual and pay your royalties. The franchisor is required to provide you with all necessary tools, training, and assistance to start and run your business.

Start the discovery process  >>>fill out the General Franchise registration Questionnaire HERE<<<

After filling out the Questionnaire >>>Schedule a Consultation HERE<<<

If you found value in this information or there is a topic you would like me to cover, please let me know by leaving a comment in the comments box at the bottom of the page.

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This Post Has 6 Comments

  1. Very informative well werth reading.

    1. Thank you for taking the time to read my article Scott. I am glad to hear you found it informative and worth reading.

  2. Hey Simon,
    Before reading this, I never took FDD that serious! But, from now on I will. I really like your take on ‘funding’ a business rather than ‘buying’ it. Enjoyed your article.

    1. Thank you for taking the time to read my article Saumya. I am glad to hear you found value.

  3. Enjoyed your article, very informative.

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