12 Top Franchise Q & A’s
The total cost of a franchise can vary greatly depending on many factors. Generally it will include franchise fees, furniture, fixtures, startup advertising, deposits, computers, working capital for a few months, salaries and etc. The total cost to get started will be located in the Franchise Disclosure Document (FDD) in item #7. The franchisor must disclose this information in this part of the FDD and it should give a low or minimum to a high amount (approximate maximum amount). It is always best to verify these numbers in the FDD by talking with their franchisee’s during your validation phone calls. It is important a candidate knows before they purchase a franchise, how much it is going to cost.
Before purchasing a franchise, if financing is going to be used, it is important to know what are your options. There are many financing options and it is best to find the one best for you. By talking with a bank, credit union or finance brokers you can determine the best program for your situation. There are numerous lending vehicles and if you are going to rely on financing, it is best to know which one you are using and get pre-qualified before purchasing the franchise. The franchisor, an advisor, a franchise consultant, the IFA (International Franchise Association) and sometimes a book or magazine can lead you to good franchise lending companies. The net worth requirements of each franchise can vary greatly. Most good franchise companies will have net worth requirements. They will usually range from 100k net worth for an inexpensive, home-based franchise to a few million dollars for a more expensive brick and mortar type franchise.
That is a question only you can answer, but if you are buying it for passion, it can get old rather quickly if you are not making any profits. Everyone would love to own a business which includes both passion and profits, but generally if it is something everyone loves doing, too many people are involved in the business and therefore the profit margins are low and little money can be made. The title of one article I read was, “Do what you love and starve.” Too many times it is true. Warren Buffett once said that he looks for “dull” companies to invest in. Why is that? Because more times than not, they are the ones with the best profit potential. Many people find you can develop a passion for most any business if you are making a great income and are providing a good product or service to your customers. If you can afford a business where you make a good profit and where you enjoy every moment because it is your passion, then it could be great. Most of the time if a person has a lot of passion, there might not be a lot of profit. There is nothing wrong with being a nonprofit business but generally if you are not making profit, you lose your passion.
With that many franchises in the market place there are some great ones and some real clunkers. It is recommended you read a good book or two about franchises, consult with a good attorney or accountant but the quickest way to weed through them is to work with a good franchise consultant. The franchisor will charge you the same using a consultant or not using one. Legally they must charge each customer the same, so even though they will end up paying the consulting company a commission, they cannot charge you more or less for using the consultant. If an advisor or consultant is charging you for their services, go elsewhere, for this should be a free service to the candidate.
First look at the consultant’s bio and see if they have any franchise background. Have they ever owned a franchise? If they have, it is a big plus. If they have they have ever started a franchise company, it is another big plus. If your advisor or consultant is financially secure themselves they will be less likely to push something wrong on you. Why would a candidate take advice from someone who has never owned a franchise? Why would you take advice from someone who is only working just to make a commission? Find a consultant who is willing to teach you how to investigate any franchise company and is willing to be a mentor to you through the process. You should want more from a consultant than one who just will present you a few companies and then never give you any good advice.
A good franchise attorney or accountant can be a very good asset to you. If they know and understand franchising, they should be able to give you good advice. An attorney with no franchise experience will usually be willing to learn on your dime. This can be very expensive to the client. A good franchise attorney in a few minutes can explain the good or bad in a FDD document, where a non-franchise attorney can take hours to research and then express an opinion. An attorney who knows franchising can save a candidate a lot of money. Most good accountants can help a candidate put together a proforma on most any franchise company. This is a spread sheet with the cost to do business included along with the potential revenues. It is important to know when and if you can make money with the franchise. A good accountant should also be able to evaluate and explain the financial statements of the franchisor included in the FDD.
This is a question that cannot be answered by the franchisor, consultant or any advisor. The closest anyone can come to answering this question will be included in item 19 of the FDD. Other than in information included there, a candidate will have to get that answered by talking with the franchisee’s of the company they are looking at. Obtaining a blank proforma from the franchisor, franchisee’s or your accountant and then as you talk with the franchise owners and then filling in the blanks, you can build a good financial statement. It is important to know at what point do most franchisee’s hit their breakeven, make 50k, 100k and beyond. You should get a good idea after talking with many franchisee’s of the company you are investigating.
Most franchise companies are set up where the buyer can have little or no experience and still be successful if they follow the system. Keep in mind you cannot put a round stick in a square hole. In other words if the franchise company requires an outgoing, aggressive personality to be successful and that is not you, you should look for a different franchise to buy. Only buy one that matches your personality. Do not buy a franchise if you can’t follow a proven system.
Some franchise companies are set up and work very well with an “Absentee or Semi-absentee” type owner while others are not. Most franchise companies are set up for a full time, hands-on owner and cannot be run very well with a part-time owner. The franchisor will tell you what time commitment is required by you. No matter if the franchisor tells you it can be ran part-time, it is important to verify it by talking with a few successful franchisee’s of the company.
Most of the time it is more expensive to buy an existing franchise, so it depends on your financial position and your goals. Many times a business can sell for 2 to 4 times the net income of a business, plus assets. Sometimes, depending on how long the business has been open, it can sell for many more times the net. If a business has been losing money it can be bought below the cost or asset value. It is sometimes called a fire sale. Buying one of these can be a good deal or a bad deal. If it is just being poorly managed and you feel you can turn it around by good management that you bring to the table, it could be a good deal. Sometimes it is a bad location or some other factor that can or cannot be changed. Sometimes buying an existing franchise business can be good, other times it can be bad. Many times buying a new franchise can be the better deal. Look at your options and see what is best for your circumstances. Get your attorney and accountant involved.
Under most circumstances you should be able to sell your franchise but the longer you have owned and the higher the net income of the business, the easier it is to sell. If you sell within the first year, you will probably lose money. Likewise if you sold after 10-years and are making a large income, the more money you can demand and get for the business. Many business brokers will tell you a business will sell 2 to 4 times the net income, plus assets. Usually the longer you own and the higher the income, the greater the multiple you can get. It is usually best to get a business broker, the franchisor, your attorney and accountant involved. It is always good to know your exit strategy before you buy any investments.
Some franchise businesses can be open within a month or two, while others could take many months or years to open. Normally the franchisor can give you the average times to start the business, but by talking with franchisee’s of the franchise you are looking at, will the best source to answer that question. Certainly home-based, office or warehouse type franchises can be opened much quicker than a build out “brick and mortar” type franchise.