Small Business Boomers

Buy a Franchise?

by jim on January 8th, 2007

Let’s talk a bit about a franchise.  You can read a great deal more about the details of franchising at www.franchisepick.com, the b5media site dedicated to franchising.  The following are general and more personal thoughts.

Basically a franchisor, the person selling the franchise, has a time tested business plan which they sell to the franchisee, the person buying the franchise.  As always the devil is in the details, the financial details and the operational details.

The big benefit of a franchise for boomers is that it gets you off to a faster start as opposed to starting a business from the ground up.  The biggest way it does this is by getting you commercial financing quickly.  A lender can look at the franchise package and make a rapid determination of the risk associated with the business proposition.  Think in terms of a home mortgage.  Your lender looks at you and fits you into a risk profile which everyone in the financial industry can understand so that if they make the loan it can be securitized easily.  A franchise makes life simple for a lender.  Simple is good.  A franchisor may even bring a finance package as part of the deal.

Quick time to market and known risk are not free to the franchisee.  You will pay for them with up-front and continuing fees.  If you are 55 or older the ability to get a business running quickly may be a big benefit to you.  I’ve brought up a business from the ground and there is a great deal of time required to develop a business package where an investor or lender understand the risks associated with your proposition.

To give you an idea of the effort, I’ve spent 18 months working 40 hours a week on a business plan and budgets to develop a package people could understand.  My business partners and I went through large amounts of rejection before we found someone who thought the risk was worth it.  Once we had the money it was another year before we had something ready to run.

Keep in mind that story represents a major success as far as doing a “from the ground” start-up goes.  It was great fun.  I recommend it to anyone who has the time and energy.  But, is it what you want for your time in life.

Franchise equals proven and proven is important.  As the purchaser of a franchise you expect the seller to have made and documented all the mistakes.  That’s horse shit, but you hope they’ve gotten the fatal ones out of the way.

To take advantage of their experience you expect them to train you until you can’t stand it any more.  After you are finished with their class room training, they should have field staff that will live with you at your franchise until you have things under control.  This all better be top notch because you’re going to pay for it.

If you decide to go the franchise route you have many to select from.  The really great ones are not for sale.  Don’t expect to buy a MacDonald’s unless you are an unusual minority who is willing to work on a nuclear waste site in the Artic.  The same holds for all the other large corporations.  (If you do find one of these buy it if you can.  It will be incredibly expensive.)You most likely will have to choose from some that are less well known.  These companies maybe known only to you and the guy trying to sell you.

That’s where the downside comes in.  A reasonably priced franchise often comes with the slimmest track record.  Still if you hit a good one your profit will be higher.  It’s the old rule of risk and reward moving in the same direction.

Your due diligence investigation of the franchisor is the only way to keep the risk associated with a less well known franchise within acceptable limits.  Due diligence costs money and time.  It is money and time well spent.  Very important, you must select existing franchisees and travel to visit them. You cannot rely on just the references the franchisor gives you.  In all cases these people will tell you more valuable information than the franchisor.

If you can find out a great deal of information about the franchisor that’s a plus, but it could all be eye wash.  Take every thing they give you with a grain of salt.  The nicest they will ever treat you is before you sign on the dotted line.  However, if information on your intended partner is scarce run do not walk to the nearest exit.  No matter what you are able to dig up buying a franchise is taking all your money and buying a single company’s stock.  When you finish your due diligence if you and your significant other cannot sleep with your decision do not do it.

Buying a franchised business can be better than buying an existing local business.  It may be a going concern, but it will have short comings.  I would not expect that that business would have anywhere near the level of documentation or training capacity that a franchise of any type would have.  You get the baggage of the going concern, good and bad.  The real downside is that you may not be able to see all the risks associated with an existing business.  Think of buying an existing house and the water heater goes out three months later.

As you might guess, selling your existing franchise can be easier and more profitable because as the franchisor you have been following a well documented formula.  The franchisor has history on when the deep-fryer will need to be replaced and at what cost.  Risks are more visible and quantifiable.

So should you buy a franchise?  Depends on the price and your passion for the business.

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