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What to Know Before Buying a Franchise

What to Know Before Buying a Franchise


Lorraine Sheak
Ok, what would someone need to know about franchising before investing into a franchise company.

Mike Magid
A lot. Where do you want to start?

Mike Powers
Let’s start at the beginning (okay) right? There’s a number of different things that I think that are important as any owner that’s investing in themselves in the business. They need to do a series of due diligence steps to ensure they’re making an informed business decision. I mean I think that’s critical. One of the things I think is reputation right? If you’re aligning yourself with a franchise, what’s the reputation? What’s their history? That’s important. We mentioned support. What kind of support can they rely on right? Is it you know the there’s the desk there’s the phone go get em tiger you’re on your own, or you’re actually getting training and education live or other ways to access it to help develop your skill sets as an owner?

Mike mentioned mentoring I can’t think of a better way. Do they have a mentoring program? From the moment that I start the process as a business owner, what kind of support am I gonna receive? Innovation and technology, you know that’s important. What are your franchise fees? What is the investment you need to make on a monthly annual basis? Are they helping you develop a business plan so that you have reserves? When Mike mentioned about folks going outta business, 90% of the people will go out of business in their first year are not prepared properly to capitalize. That’s one of the biggest reasons. People are not properly capitalized. Sort of so from a business aspect and metrics that is I’m certain you know there’s others out there that we can we can talk on and I’m going to have Mike share some of his thoughts on that as well.

Yeah I mean if you’re thinking about what you need to…if I was going to advise somebody to buy a franchise, I would say let’s start highest level, and let’s just look at the industry first. Because one: is the industry one I want to be in? Am I going to enjoy doing that every day? Is that industry going to allow me the ability to grow my business and allow me to live the American dream by building equity in the business, giving me the lifestyle that I want, reducing any debt that I want to reduce in order to get closer to my retirement years, you know? Is it going to do those things for me? And the only way you can tell whether the industry is going to do it is by doing real due diligence on that industry.

So we talked about it a few minutes ago: home health, home care is very recession resistant. Understand why it is. Understand these statistics and do your due diligence on the industry. And once that’s done, then you start and if you’ve honed in on an industry, then look at two or three companies within that industry and do a comparison, right. What do they offer you? What are their systems that they have you can get trained on and rely on that will help you grow your business? What is the support they have? How detailed is that support? Is there field support or a component of field support or is everything done via the phone? What do they do to when you’re struggling to help you get back on track?

So we have this expression it’s like driving a car, right. You have your hand, you should have it at 10 and 3. So what happens is franchisees as they get into the business, they start driving and the hand goes from 10 and 3 down to I mean 12 and 3 excuse me. And then the three hand drops off and now they’re driving one hand. And then the the hand at 12 o’clock goes to the hand at 6 o’clock. And all of a sudden they’re sitting there saying, “Why aren’t I meeting my goals? Why am I not tracking with my business plan?” And the beautiful thing about a franchise system and franchisor is they’re the ones that when that’s happening, they get your hand back to 12 and 3, and they keep it there steady, working with you, coaching with you, counseling with you, training with you, to make sure you get the growth that you want. So you want to make sure that the company has what they say they have. And part of the way that you can do that is by making sure you get to a discovery day and meet the team and make sure that you are comfortable with the team that supported you. And if you do that, you should be able to pick the right company, especially if you have a few in the same industry.

Make sure that you’re financially prepared. Michael mentioned it. People fail because they find an opportunity, and they want to get in the business, and franchisors says, “Well you’ve got enough money to buy the franchise.” And then they sign a contract, they pay their money, they get into the business, they don’t ramp up the way they did, and then all of a sudden they’re in financial peril, they don’t know what to do. And that is not a position that any business owner wants to be in. So make sure you understand realistically what the financial investment is and if it’s X amount, add to it. So if the franchisor says, “Here’s how much it costs to get in,” add fifty of a hundred thousand to it, but make sure you have that money to be able to rely on as cash in the bank to work on.

And then from there, we’ve already talked about, this is important, I think the last piece is look at the franchise agreement and have it reviewed by a franchise attorney, not a general attorney, not a contract wall attorney. Because they’re going to tell you that they’re gonna want to make wholesale changes to the franchise agreement. Most franchisors, Michael you tell me if I’m wrong on this, most franchisors don’t change their contract. It is what it is. So you need a franchise attorney that’s used to looking at those terms and conditions and saying, “Here’s what it means, and here’s how it impacts you, and here’s how it impacts them.” And that way when you’re done with the review, you can make a decision on all the terms and conditions about whether you can live with those terms or not. If you can’t, you don’t sign the contract. And if the franchisor isn’t going to change it, which in most cases they won’t, then you don’t buy that franchise.

I think when you do that level of research on the franchise agreement, then you walk in with your eyes wide open you sign a contract and you know exactly what you’re getting into when you sign that contract and you don’t have buyer’s remorse. But I think that’s a critical piece of the puzzle. So industry research, company research, financials, make sure you understand the team, their systems and support, and do a contract view.

And I’ll go back to something Michael said a few minutes ago the award we won is Franchisor of the Year from the AAFD, the American Association of Franchisees and Dealers,
that our franchisees voted us on. We scored a 97 percent on their fair franchising seal because we worked with the Association, not our internal association, the trade association on our franchise agreement to create the fairest franchise agreement within the industry. When you work with the companies like that, you’re going to be very comfortable signing a franchise agreement, and if you do all that, you are in good shape, you’ve done your investigation, you’re thorough. And one last thing I should have mentioned: any franchise opportunity out there will turn over their lists of franchise owners, and you’ll be able to call all of them. And you should call as many as you need to get the answers that you need from people that have done what you’re considering doing, which is buying a franchise, that are in that franchise and get the take on the business, the financials, the industry, the pros and cons, etc. If you do your proper validation, you’ll walk into a business making the right decision.

Yeah I think that’s so important. One thing I would like to add: I’ve talked to many prospective business owners out there as Mike has in our career. And I think you just have to follow the process right. Do your due diligence. I think many folks stop before it gets started. It should be a consultative approach to you learning about the franchise, beginning with the franchise disclosure document the FDD, which tells you a lot about the organization from a business perspective. These things like that lawsuits, all those things that are really important for you to know, and then the second, which is separate from the franchise agreement, and Mike is what he said is so accurate, franchisors are not going to change those franchise agreements. So it’s important to get your board of directors that will help you navigate through. But the key to that is having a franchise attorney look at the franchise agreement.

Can I interrupt you? Michael, share with the audience what do you mean by board of directors? Because it is an amazing thing to have around you when you’re considering buying a business for when you’re in the business how to how to stay on course beyond what the franchisor. Explain the concept of the board of directors.

Okay great I appreciate that every business owner has professionals that they have in their network, right? I mean usually at home, my wife is the chairman of my board of directors right to make sure that I’m out there doing the things that I need to do. But the Board of Directors like any corporation, we have a board of directors, and what they do is they look at it and help me perform the due diligence. And they are basically going to ask you questions and maybe difficult questions to answer. But there are going to help you stay on track as a business owner, such as do you have a business plan? What does that a business plan tell you? Can you tell me your strategies, your tactics? What is your financial aspect of your business, your performer? But these are people that are your attorney, your accountant, business professionals that are going to give you that other perspective that you may not be looking at. But you need to know that it will help you formulate you know a solid plan of action to be successful. And then they’re going to hold you accountable to your plan, where you would actually meet with them on a quarterly basis; those professionals that you value. You know it could be anybody in your sphere that will help and they’d be committed to your success. So having the board of directors or or something that you might call just your business associates made up of your attorney, your accountant, you know could be your significant other, and some other business professionals that will help you stay on track and hold you accountable to your business plan and also hold you accountable to make adjustments to your business plan when things aren’t working right. I mean that old saying don’t be wrong long. So you need to adjust. So we like to consult with our perspective franchisees and tell them, “Hey, it’s important to have that the business, that board of directors that will have a business focus and help you be successful.

Yeah a lovely concept. Appreciate you sharing.

That’s great information.