Buying a franchise is no different from buying any other type of business. Everything needs to be properly checked out and a value placed on the business.

And contrary to what the franchiser would like you to believe, the price is not set in stone and you should not believe everything you are told.

This article gives the buyer the questions to ask and what you should look for.

It is said that 50% of all businesses will be franchises in the not too distant future. There are two very attractive aspects to a franchise that accounts for their growing popularity.

The first is the reduced risk to a naïve franchisee not experienced in business because of the professional training and support received. And the franchisor’s success is only as good as the franchisee, so it’s in both parties interest that the franchise succeeds.

The second is the money that can be made from setting up your own franchise. If you already have a good business and everything is working for you, franchising it rather than just expanding the business can be a great idea.

The disclosure rules for franchises are exhaustive (and exhausting to read) and there is no doubt that just about everything you need to know you will be told. In a way it’s almost too much information. You wade through dozens of pages of legal stuff and a lot of it goes right over your head.

It’s usually a condition that you consult a lawyer or attorney and that’s good.

Here are the tips:-

Tip 1. How Tightly Is It Controlled?

The first thing you need to settle is just how tightly controlled a franchise it is and if it will suit you. They can range from being simple agencies where you handle all the marketing and they pay commission on any sales, to McDonalds types where you are in effect an employee working ridiculous hours (but you don’t get wages) – and every possibility in between.

Tip 2. Is The Asking Price Fair?

A franchise should be checked out and valued just like any business to determine if the franchise purchase fee is fair. Often people pay far too much for far too little reward.

Tip 3. How Well Has The Franchisor Performed?

Check with at least a half dozen other franchisees as to whether the franchisor performs as they are supposed to, particularly in advertising, training, management systems and support.

Tip 4. What Happens When You Want To Sell-out?

Examine carefully the sell-out clauses. Can you sell freely or does the franchisor take it back or set the price? Is the agreement permanent or for a fixed period of time and then expires? Can it be renewed, and if so, do you have to pay another fee?

Tip 5. How Safe Is Your Territory?

What happens to sales you make outside your territory? Is your territory sacrosanct or can they carve bits off it or take it back if you don’t perform? If that happens, what refunds do you get?

Tip 6. Can You Split Your Territory?

What are the rules for splitting up your own territory if it gets too big and unmanageable for you as you grow?

Tip 7. How Strong Is The Franchisor?

Get your CPA to assess the financial strength of the franchisor. They are usually obliged to comply with all reasonable requests for information. There is nothing worse than buying into a franchise and then seeing the franchisor collapse shortly afterwards.

Tip 8. How Good Is The Franchise?

Assess it as you would any other business. What are the future trends in the markets for their products and are they keeping pace?

Tip 9. Stand Up To The Franchisor.

In the end, remember that you are still just buying a business. Be just as suspicious and paranoid, and check everything out. Don’t be afraid to ask stupid questions and don’t be browbeaten into submission.

Tip 10. Negotiate The Price.

You can buy franchises in two ways – from the franchisor in the case of a new area being opened up – or from an existing franchisee who wants out. In the second case you would not hesitate to haggle with the owner over the price. But it seems to be different when people buy direct from the franchisor.

Remember that the asking fee for the franchise is not set in stone, even though the franchisor would like you to think that it is. Not all franchise areas have the same prospects, so it is quite legitimate for you to question the price and make a lower offer – especially if it is supported by a formal valuation like yours should be.

This article was written by Brian K Fitzgibbon CPA.

Brian is an experienced accountant and small business consultant. He runs his own business, lectures extensively on small business topics and has checked out and valued many hundreds of small businesses for buyers.

Brian is also the author of the highly acclaimed and invaluable
"How To Value A Business And Buy It Without Fear"
A do-it-yourself guide for first-time and experienced buyers alike.

To download a FREE Chapter from Brian's book please follow this link: "HowToValueBusiness.com"

May 1st, 2009 | Tags: business valuations, buying a business, buying a dud business, checking out a business, checking the figures, dangers of business valuations, disclosure rules on buying a business, diy business valuations, due diligence on a small business, expense of business valuations, how to buy a business, how to value a business, selling a business, tips on buying a business, tips on buying a franchise, traps to avoid in buying a business, valuing a business for sale, valuing franchises | Category: articles | Subscribe to comments | Leave a comment | Trackback URL  |