Jump to content

Buying a Business or Franchise


Enda Goodwin
 Share

Recommended Posts

Senior Operative

Senior Operative

  • [1] JUNIOR ENLISTED

Buying a Business or Franchise (Step 1): Explore Your Motivations and Skills

Goal: Decide that it’s worth the time and effort to move forward with this idea, or realize that buying a business or franchise is wrong for you.

Buying a business/franchise is a major decision, especially if you have never bought or run one before. And if you have spent most of your career as an employee in an organization, you should be doubly cautious to carefully examine your motivations and skills before you decide to do this.

Let’s face it, many of us have idealized notions about buying and operating a small business. But the risks are high. This Step is designed to help you sort out your skills and interests, so that you make an informed decision.

Franchising is an arrangement in which a franchisee buys the right to sell a product or service from a franchiser. Generally, there are two types of franchises:

  • Business Format Franchise: a franchiser licenses the rights to sell a product or service, and provides proprietary methods for operating a business (such as a fast food restaurant or a print shop), including marketing support, systems, and training.
  • Product or Trade Name Franchise: a franchiser sells the rights to use a trademark or brand name as part of an existing business (such as a beverage distributor or a car dealership).

Acquiring a franchise requires two sets of skills: one for making the right selection, and the other for operating the business successfully after you’ve purchased it. If your experience includes evaluating businesses, you probably have the selection skills. But two important questions remain: will you be a successful operator, and is this how you want to direct your career?

Franchise ownership is a life-changing career decision, and can involve significant financial, physical, and emotional risk. Before making a decision, you should carefully consider how this transition will affect your personal happiness and that of your family. We suggest you check out these links from Bison and the FTC.

Even those who have examined and purchased businesses for large corporations can find that purchasing a business for themselves requires different skills. Similarly, those who have managed large businesses find a small business a different challenge. Just because you’ve done it on a big stage doesn’t mean you can do it on a smaller one.

Knowing who you are, what you want, and why you want it, will propel you in the right direction. At the very beginning of your thinking about this option, you want to do some self-examination to consider:

  • Your assets (both personal and financial)
  • Your lifestyle needs
  • Your support systems

Assessing your motivations, skills, interests, assets and liabilities, will help you get a clearer picture of why you’re drawn to this possibility, what you bring to it, and where you may want to look for experienced assistance.

It’s the rare person who has all of the skills and abilities to successfully buy and run a business. People who know themselves well (and know when to call on others for help) are the ones most likely to succeed at this.

Buying a business

Questions to ask

  • Why do I want to own my own business? Why am I considering an ongoing business rather than starting a business from scratch or purchasing a franchise?
  • What types of business might I excel at running? What experiences have prepared me to do this? What role do I want to play in the business?
  • Do I have all of the business skills, financial resources, and personal support to make the business a success? To complete the purchase? What are my greatest strengths and assets? What are my most serious weaknesses and liabilities?
  • Will I enjoy owning a business? Will the daily activities, challenges, and responsibilities satisfy me? How do I see my life after purchasing a business? How will my life be different? What will a typical day be like?
  • How will my family, friends, business associates and others respond to this? What impact might this have on those relationships?
  • What do I really know about buying a business? What reading or research have I done? Who have I talked to about this career option?
  • Is this the right time in my life to pursue this option?

Buying a franchise

Questions to ask

  • Why do I want to own my own franchise? Do I know what’s involved? Have I considered all of the lifestyle changes it will entail? Am I willing to make these changes?
  • Do I have the necessary skills? Am I interested in taking on a wide range of possibly unfamiliar tasks? Am I willing to do whatever it takes to make the business succeed?
  • What is my physical and emotional stamina? Am I willing to work long hours, perhaps seven days a week, with little or no vacation?
  • Is my family on board for the changes and potential sacrifices? Will they encourage and assist me? Am I willing to take business problems home?
  • How far am I willing to stretch my finances? Will I be stressed by having so much of my funds at risk?
  • How do I feel about the relationship with a franchiser? About living up to their standards? About my obligations to them?
  • Am I likely to meet the franchiser’s standards?

Additional resources

Links

Books

Link to comment
Share on other sites

Senior Operative

Senior Operative

  • [1] JUNIOR ENLISTED

Buying a Business or Franchise (Step 2): Explore Franchising and Define Your Ideal Business

Goal: Know enough about buying a business or franchising to develop a brief written definition of the kind of business/franchise you’re looking for, and identify six prospects.

As you explore buying a business or acquiring a franchise, you’ll naturally consider what kinds of business/franchise opportunities might be appropriate for you. There are literally thousands of opportunities, so it’s important that you define your own precise criteria for your own ideal business.

Defining your criteria allows you to focus your search and to evaluate possibilities in terms of what you want in a business. First you need a clear vision of what you want most. Then you need to translate this into a concrete description and do a reality check on it.

Your personal interests play a role. What’s your background and what are you good at? Are you more of a people person or an operations person? (You’ll need to be both, and a financial person, too.) What kinds of smaller businesses are you attracted to?

Geography may also play a role. Where do you live (or want to live), and which business/franchises represent the better opportunities in your area? But know that many franchisers tightly control their territory assignments, both to protect their current franchisees, and to aid their expansion into underdeveloped (for them) areas. Are you willing to operate in an assigned area, possibly far from home?

You need to understand how franchises work, the types of franchise agreements, franchiser-provided financing (if provided), and what kinds of franchise situations fit your preferences and your wallet. Read publications on franchising, review newspaper listings of franchise opportunities, and search the Internet. See the association links listed below, and visit Bison.comInc.comEntrepreneur.com, and StartupNation.com. Talk to people you know who own franchises, or have owned them.

In addition to convincing yourself, you may have to convince others (such as the seller, a lender, an investor, or your family) that a particular business is right for you. This step ensures that you have defined the business you would like to buy, one that you are likely to succeed at, and for which you can garner sufficient financial support, if you need it.

Once you have clearly defined what you are looking for, write a search memorandum. A search memorandum is typically a short document that can be given to network contacts, advisors, brokers and possibly targeted company owners.

The search memorandum should define your criteria and clearly describe the kind of business/franchise you want to buy, profiling the industry, product or service, preferred location, your time frame, and your qualifications. You should also have some reasonable expectations of what you want in revenue, profit, the franchiser’s track record, the initial cost, cash flow and return on investment. Make it a short, friendly and compelling document that will get people’s attention. 

As you sort out the possibilities of buying a franchise, you should sketch out desirable characteristics, along with a preliminary list of franchise opportunities that may fit them. Write a one-page (or less) description of the ideal franchise for you, and identify at least six franchise opportunities that appear to be a close match. Later, you’ll expand this list to 10 or 12.

You’ll need to define the business you want to buy.

Buying a business

Questions to ask

  • What’s the ideal industry for me? The ideal product or service? Annual revenue? Location?
  • How much can I afford to invest? How much am I willing to risk?
  • Am I seeking a particular business environment? What kind of physical conditions are important to me? How many hours per week am I willing to work?
  • How important are factors such as reputation, location, past success, competitive rating, existing personnel, and the willingness of the owner to finance? What other factors do I feel are essential?
  • Will I want the current owner to play a particular role in the business?
  • How much income will I need in the first year? In the second?
  • Have I written a short, friendly and compelling search memorandum?

Buying a franchise

Questions to ask

  • What are the advantages and disadvantages of franchising for me personally?
  • Exactly what kind of franchises interest me most? Name brand? Fast food? Business services? Consumer services? Retail? Why?
  • What particular franchise environment am I seeking? What kind of physical conditions are important to me? What hours of operation? What level of staffing?
  • How much am I planning to invest? How much can I afford to risk?
  • How much income will I need in the first year? In the second? After that?
  • Am I looking for an existing franchise business which is already up and running, or would I prefer to start up a franchise operation?
  • Where will the franchise be located? What is my geographic preference? How large a territory or geographic commitment do I want?
  • In an existing franchise, how important are factors like reputation, track record of success, current competitive rating, the quality of support I will receive?
  • How important are factors such as existing personnel and the willingness of the franchiser to finance?
  • Have I written a concise definition of what I am looking for? Can I explain it easily to others?

Additional resources

Links

Associations

Books

Link to comment
Share on other sites

Senior Operative

Senior Operative

  • [1] JUNIOR ENLISTED

Buying a Business or Franchise (Step 3): Create Your Board of Advisors

Goal: Line up three to six people who will provide straight advice to you on buying and operating a business or franchise, especially in areas where your skills are less developed.

Very few people are expert in all areas of buying and operating a business. As a result, many successful business owners form a board of advisors, tapping into the know-how of three to six people (or more) who have specialized knowledge, experience, and expertise, and are not afraid to express their honest opinions.
A board of advisors can increase your chances of success in two areas:

  • by providing the providing the professional advice you need to evaluate and purchase a business
  • by assisting in your transition to owner/operator

Begin by identifying the kind of expertise you need, then find appropriate people to provide it. Make sure that you feel comfortable with the people you choose, as you will need to be forthright with them. Select people who will ask tough questions and oppose bad ideas.

You will need an attorney to help assess the structure of the business, analyze the legal obligations and risks you may face, and evaluate the contracts and their implications. An accountant, preferably one with small business experience, can help you assess the financial integrity of the business by reviewing revenue, expenses and cash flow projections, and can identify insurance and tax issues. You’ll also want advisors who run non-competitive small businesses or franchises.

You may meet with your entire board of advisors occasionally, but you will generally call on them individually for specific advice in their area of specialty. Some of your advisors will be paid. You may trade out services with others, and some may be friends or acquaintances that you enlist for support as well as expertise. But choose wisely. Don’t ask people to participate unless they can pull their weight.

Questions to ask

  • Does the advisor have experience in an area where I need assistance?
  • For advisors I do not know well, have I spoken with people who have worked with them to check out their skills and reputations?
  • If the advisor charges fees, are they appropriate?
  • Do I feel comfortable with the advisor? Will the person be objective, willing to say no to unsound ideas, and speak up about tough or critical issues?
  • Which of the following specialties should I consider for my board of advisors?
    • Accountant (experienced in buying businesses)
    • Attorney (experienced in buying businesses)
    • Commercial banker with small business experience
    • Financial planner
    • Seasoned businesspersons
    • Industry and functional experts
    • Marketing consultant
    • Insurance expert
    • Current small business owners
    • Franchise owners
    • Insurance expert
    • Individuals who have bought businesses in the past
    • Potential customers or suppliers in the kind of business I am pursuing

Additional resources

Link to comment
Share on other sites

Senior Operative

Senior Operative

  • [1] JUNIOR ENLISTED

Buying a Business or Franchise (Step 4): Investigate Financing

Goal: Know how much capital you have and are willing to put into the business, and where to go for more.

In addition to the purchase price, you will need a reservoir of working capital to ensure the success of the business, and to cover your first year or two of operation. When purchasing a franchise, many franchisers require that you show proof that you have working capital for the first year or two. You may not see a paycheck for this period. You’ll also need a cushion for unforeseen events (which are bound to happen). All of this can add up to a significant sum. Your business will surely fail if you go broke.

Franchises come in all sizes and at all price points. You might be able to finance the purchase with your own savings, or you might require millions more than you have.

You need to take stock of your personal financial resources. Sort out your short and long-term needs, particularly your cash flow, and determine how much money you might realistically risk to purchase and operate a business. You may want the help of a professional financial planner for this step, as well as a thorough discussion with other members of your household.

If you need to supplement your own funds, estimate how much additional capital you’ll need from investors or through loans. You’ll have to share your personal balance sheet with investors or lenders, so your finances must be well organized and your credit history clean. Naturally, investors and lenders will expect your significant participation in any financial risk.

Research lending or investment institutions to find out how they like to be approached, what kind of projects they prefer, and what kind of documents they require before considering participation. Your board of advisors may help with introductions. Speaking with potential investors or lenders early will make you better informed when you approach them with your finished proposal and wish to line up the financing.

Note: franchiser financing may be an alternative. Nearly one in five franchisers offers some kind of financing. Some will finance the entire investment, other just finance the initial fee.

Questions to ask

  • What sources of capital or security do I have at my disposal (savings, deferred income accounts, credit lines, home equity loans, insurance policies, IRAs, 401(k)s, houses, cars, jewelry, etc.)?
  • What are my short-term and long-term personal cash flow needs?
  • Do I have children approaching college age?
  • Exactly how much am I willing to put at risk?
  • Should I use an accountant or financial planner to suggest the best ways to organize and leverage my personal financial picture?
  • Will I need loans from individuals, institutions or the franchiser?
  • Will I need funds for the down payment, operating capital reserves, or both? How much, roughly, for each? How long a payout period do I anticipate before I’m able to start taking money out of the business?
  • If I am considering going into business with a partner or investors, do I know what their goals are? What will be their roles, and mine? What about control issues and voting rights?
  • What will an investor or lender want from me?
  • If buying an existing business, what can be required of the seller?
  • How do I convince the seller I am serious? How am I unique? How can I differentiate myself from others seeking the business or seeking funds?

Additional resources

Links

Books

 
 
 
Link to comment
Share on other sites

Senior Operative

Senior Operative

  • [1] JUNIOR ENLISTED

Buying a Business or Franchise (Step 5): Select a Business or Franchises to Pursue

Goal: Identify at least two to four businesses or franchises for sale that merit more investment of your time.

Targeting a Business

Finding viable businesses that offer the right opportunity, as well as the right terms and price, requires research, both passive and active.

A passive search includes looking at posted ads in publications and on Internet bulletin boards. Keep in mind that the business deals that are the easiest to find are usually also the worst.

Another technique is using a business broker. But before you decide to use a broker, research the pros and cons of this option, and obtain both referrals and references. Remember that the broker typically works for the seller, not you.

An active search can increase your chances of identifying the right business. The best active strategy is to network — getting referrals to business owners and industry leaders who can help connect you with opportunities. This will also serve to educate you about the industry, so that by the time you identify prospective businesses, you will be better prepared to evaluate them.

Another twist on an active search is using direct mail to initiate the contact. Send out letters giving your qualifications and criteria and asking recipients to help you identify businesses for sale. Experts suggest mailing 50 to 100 letters and following up each contact with a phone call. Some buyers also place targeted advertisements in journals, newspapers, and on Internet sites, expressing their qualifications and interest in purchasing a particular kind of business.

As you locate businesses that meet your criteria, you will need to screen them to determine which ones are worth pursuing. A good method for this initial screening is a conversation with the owners. Keeping your criteria in mind, have a good long talk with the owners. Ask questions and listen carefully.

Questions to ask

  • What passive search techniques will I use to find businesses for sale?
  • Will I look at "businesses for sale" listings in newspapers? Trade journals? Trade association listings? Internet posting services?
  • Will I use a business broker? How can I research this option and identify good brokers to check out?
  • What active search techniques will I use to identify potential businesses?
  • Will I ask for referrals from accountants, bankers, suppliers, insurance agents, Small Business Administration liquidation officers?
  • Will I send direct mail letters to prospective businesses? Make phone calls to business in the industry I have selected?
  • Will I place ads in industry and trade publications outlining my qualifications and interest in purchasing a specific kind of business?
  • How will I screen candidates? What questions should I ask to determine the owner’s motivation for selling? To determine how well the business meets my criteria?
  • What’s the major obstacle standing in the way of my finding a business for sale? What’s my strategy for overcoming that obstacle?

Targeting a franchise

Now it’s time to narrow down the field of contenders. If you did a good job earlier in exploring and investigating franchises versus your own defined business criteria (see Step 2), you’ll have an easier time with this step.

As you’ve gotten deeper into this, you have probably expanded your initial list of 6 possibilities to 10 or 12. If you have not, do so now. (See the questions at the end of this Step for help, and check the listings on the Bison and Entrepreneur websites.)

Then begin contacting those 10 to 12 potential franchisers to get further information and a franchise kit, which is likely to include:

  • A history of the franchising company or its predecessor(s)
  • An overview of the franchise stressing the benefits to a franchisee
  • Qualifications for becoming a franchisee
  • Credibility devices, such as ad reprints, photographs and product samples
  • Financial assistance available (if applicable)
  • Information about how to become a franchisee and a set of application forms

After you review this information, reduce your list of franchise prospects to two to four, ranked in order of interest and preference. Make sure the businesses are ones you feel you might excel in and enjoy, that you have sufficient resources to invest, that the return on your investment of time and money would be worthwhile, and that the franchisers appear to be reputable.

Every franchise company has the right to present itself in the best possible light, but there have been many examples of fraudulent claims. Trust your instincts on overoptimistic projections or misrepresentation.

You don’t need every last detail at this point because you’re not ready to decide. Rather, you’re now going to weed out most of them so that you can investigate two to four potential opportunities more closely.

Questions to ask

  • If I haven’t already, how will I go about making a list of 6 to 12 franchise opportunities?
  • What Internet sites, newspapers, journals, magazines and directories that focus on franchising will I read?
  • Can I speak with franchise owners about how they went about the selection process and what they learned?
  • Will I attend franchise expositions or trade shows? Which? Where?
  • Do I want to retain a consultant who specializes in franchises?
  • Have I generated a list of questions or criteria to help screen the options?
  • Would I really enjoy running this franchise on a day-to-day basis?
  • Who would I be interacting with?
  • What are the employees and customers like? What types of relationships might I have with them?
  • Do I have the skills or could I learn to operate this business effectively?
  • Are my financial resources sufficient to purchase and operate this business?
  • Does the franchiser offer financial assistance? If so, what kind?
  • Am I likely to get a return on my investment that will meet my goals and objectives?
  • Would I enjoy partnering with this franchiser? Are they reputable? Am I comfortable with the information they have provided?

Additional resources

Links

Magazines

Books

Link to comment
Share on other sites

Senior Operative

Senior Operative

  • [1] JUNIOR ENLISTED

Buying a Business or Franchise (Step 6): Begin Due Diligence, Secure and Evaluate Disclosure Documents

Goal: Get enough information about the business or franchise, the owners and their motivation, to go after the business.

Once you have identified a business that appears to meet your criteria, preliminary due diligence begins. The goal here is to gain an understanding of the business and determine whether to pursue the purchase.

Create a checklist that covers your concerns, issues and questions, and use it. Many public accounting firms provide buyers’ due diligence checklists, and some are available online.

Talk with competitors, suppliers, and current customers to gain insight into the industry in which the business competes, as well as how this particular organization is viewed in the marketplace.

But perhaps the most important part of this preliminary due diligence is talking to the current owner. This is particularly necessary in a service business, which are often more dependent on the owner and his/her personality, skills, relationships, and approach to the business. A key consideration for you is whether the business is sustainable without the current owner.

While most owners planning to sell will not intentionally attempt to deceive you, they may not provide certain information if you fail to ask for it. You will be wise to follow your hunches and ask whatever question you have, even if you are not sure where it will lead, or you eventually discount the response.

Remember, the purpose of this research is to gain an overall picture of the business and the climate in which it operates. You can then compile a list of pros and cons to help determine whether to continue to pursue this option or to focus on something else. In this preliminary due diligence, you are not confirming any information you get. You will ask for evidence later, if it is needed.

Questions to ask

  • Have I created a comprehensive checklist to focus my research and questions?
  • Why are the current owners selling? What do the owners want out of the sale? What are their goals and objectives?
  • What are the owners looking for in a buyer? What will convince them that I am serious?
  • What information do I need from the owners to determine if the business is worth pursuing?
  • Can I replace the current owner? Could anyone replace him/her?
  • What does the owner do? What do others in the business do?
  • Is the owner the only salesperson? Does he/she handle all the accounts? Is the owner the only truly competent person in the organization, so that nothing gets done without the owner’s direct participation?
  • Are there a number of highly competent employees, with high morale and low turnover? Can I keep them on? What if they leave?
  • Are some of the employees related in some way to the owner? How they are involved in the business? Is the owner’s spouse/partner a key employee? Are several large customers relatives, long-time friends, or neighbors of the owner? Is there a key supplier or subcontractor who is a relative/friend/neighbor?
  • What competitors can I talk with to Additional resources about the business/industry? When they think of the business, what comes to mind?
  • Which suppliers or customers can I talk to? When they think of the business, what comes to mind?

Secure and evaluate disclosure documents for a franchise

Now that you’re down to two to four possibilities, it’s time to research them in more depth.

If you have not already done so, request the Uniform Franchise Offering Circular (UFOC) from your candidate companies. Much like a Form10-K, the UFOC discloses the details of the franchiser-franchisee relationship from a financial and legal point of view, and a significant amount of other relevant information. Although some organizations will send a UFOC in their initial franchise kit, many will wait until they believe you are seriously considering their franchise opportunity — or until you request it.

The UFOC is intended to protect the prospective investor. It includes such things as facts about the franchiser, its predecessors, any litigation pending, fees, obligations of the franchiser and franchisee, projected earnings and trademarks. The UFOC also includes:

  • A written description of the business and its market
  • A resume for each officer and key management personnel
  • Financial statements for the franchise company and all its affiliated companies, in audited form, for at least three years
  • A copy of all documents that you will be required to sign, as well as all documents you will be subject to

At this point, your work is to review and evaluate these documents and search between the lines to ensure that you understand what you may be getting into.
When you begin to seriously consider a franchise, you should get your financial and legal advisors involved in evaluating the UFOC, though this may cost you some money. But better to spend a little now than lose a lot later.

Questions to ask

  • Has the franchiser provided the Uniform Franchise Offering Circular (UFOC) or equivalent prospectus? Is it complete and accurate, as far as I can tell?
  • Was the UFOC accompanied by a copy of the franchiser’s most recent audited financial statements?
  • Did a copy of the franchise agreement accompany the offering circular?
  • In reviewing the documents, is the information consistent with what else I know? Are there any surprises? Red flags? Anything I want to investigate further?
  • What do my attorney, accountant and other advisors see in these documents? What are the greatest strengths they reveal? What are the most serious liabilities?
  • Are the contracts I would be expected to sign fair and reasonable?
  • Do I have enough information from the franchiser to feel that I understand the basic legal and financial obligations?

Additional resources

Links

Books

Link to comment
Share on other sites

Senior Operative

Senior Operative

  • [1] JUNIOR ENLISTED

Buying a Business or Franchise (Step 7): Examine the Current State of the Business or Franchise

Goal: Understand the strengths and weaknesses of the business or franchise as it operates today.

You now need to assess the current state of the business to fully comprehend its strengths and weaknesses as it operates today. For the moment, you need to put aside your own ideas for improving the business, because the price you pay should be based on how it exists today, including its financial condition, customer base, assets, liabilities, personnel, reputation, and profits.

A franchiser builds its business by romancing potential new franchisees. No matter how reputable the franchising company is, you can’t rely solely on their materials to evaluate the business. And if you are using a franchise broker, keep in mind that they are paid to promote and sell the franchises they represent, so they’re not an objective source of information.

Review various sources of information to assess the franchiser’s reputation, financial health, leadership, relationships with franchisees and future prospects. A library database search may reveal articles about franchisers, positive and negative. An Internet search may uncover a site or active blog of dissatisfied franchisees, customers, employees, or suppliers. There are also numerous government agencies, consumer groups and franchising publications that provide information about specific franchises. Some are listed below. Take the time to conduct a thorough review.

You should complement your analysis of the business/franchise on paper with in-person, on-site observations of the business in operation to get a clearer picture of what you are getting into. Actually seeing the employees, customers, processes and equipment in operation, as well as assessing the challenges you might face, will be extremely beneficial to you in making an informed decision. Observing the business in action can also give you some insight as to how your days might be spent, the types of issues you may be called upon to resolve on a daily basis, how operations could be improved, how costs might be curtailed, and a myriad of other things.

If you are thinking about purchasing a spin-off of a large company, make sure you know how the infrastructure will change, and what resources might disappear as a result of the parent company’s withdrawal from the business.

If you are buying a business, not a franchise, the seller should provide you with three to five years of P&L and cash flow information and possibly tax returns, typically in return for your signing a confidentiality/non-disclosure agreement. Later, in writing a business plan, you will combine this research on the current state of the business with your research on customers, competitors and suppliers (from Step 6).

Prepare your questions and speak with as many different franchise business operators as you must to get a comprehensive picture. Find some on your own as well as talking to those referred by the franchiser or business owner. And, if at all possible, talk to people who are former owners, and get their thoughts on why they did not remain franchisees or the in business.

Assessing the business

Questions to ask

  • What is the reputation of this business?
  • What value does this business offer its customers? What is the competitive advantage of this business?
  • Is the business well-managed?
  • How do I compare with the current owner? Where am I better? Where am I worse?
  • What impact does the current location have on the business? Could I relocate this business?
  • Is the operating profit dependable and stable? What effect does seasonality have on the business?
  • How does work flow? Is the operation organized and efficient?
  • Who are the employees? Would I like them? Are they competent? How do they treat each other? Customers? Suppliers?
  • Is this business using technology to best advantage?
  • What else did I observe that will help me make an offer?

Evaluating a franchise

Questions to ask

  • Has the franchiser provided a list of franchisees that I can contact? How can I locate others who are not on this list?
  • What am I going to ask the franchisees that I contact?
  • Can the current franchisees help me locate some former franchisees? How else might I locate former franchisees?
  • Can I observe a franchise anonymously to evaluate product and service quality? Are there customers or suppliers I can speak with to get their perspective?
  • Have I conducted thorough research using various outside sources?
  • What outside resources will I use? (See list of links below.)

Additional resources

Links

Books

Link to comment
Share on other sites

Senior Operative

Senior Operative

  • [1] JUNIOR ENLISTED

Buying a Business or Franchise (Step 8): Analyze the Potential of the Business or Franchise

Goal: Understand the marketplace and the future potential of the business or franchise.

While observing the business in its current state, you’ll concurrently begin to analyze the long-term viability and potential of the business/franchise. Consider whether the business is sustainable, whether it can grow, what the dynamics of the marketplace are, what trends might affect the business, who/where/how the competition is, who the current and potential customers are, and what they want. The same franchise concept may perform very differently in Wichita, KS than in Portland, ME or Sacramento, CA.

Look into these issues yourself, as well as asking the current owner. Remember that one reason owners sell is that they have reason to believe its potential is limited or diminishing.

Before purchasing a business you want to understand the marketplace in which your business operates. When you understand the trends impacting the industry and the niche this particular business occupies, you can assess what kind of future the business might have. Study the industry and its trends, even if you have experience in it. You may also uncover some unexploited opportunities that could fuel future growth.

Checking out the competition will help you assess where this business stands in the market. How would the product or service work in your local market? Seeing what the competition offers and at what price, how they market and sell their products and services, what they consider important to their customers, and what they pride themselves on, will give you an idea of how competitive your business will need to be. A Mexican restaurant concept might appeal more to residents of Waco, TX, than to residents of Syracuse, NY, even with considerably more competition. Consider also how consolidation of any competitors might affect the business.

Knowing the history of the customer base, whether they are loyal to the products/services or to the people, whether that customer base will expand or contract, will help determine your risk. No business is successful if customer needs are not met. The more you can learn about current and potential customers — what they need and why they buy — the greater your likelihood of success.

Analyzing the potential of the business

Questions to ask

  • What is the market? What niche does this business/franchise serve?
  • What trends are impacting the industry in which this business operates? Are there industry publications, websites, or other sources where I can Additional resources about these trends? In particular, how is technology changing the dynamics in the marketplace?
  • What is likely to have an impact on the need for these products/services in the future? What could the market look like five years from now?
  • Who are the leaders in this industry? What makes them unique?
  • What kind of competition exists in the marketplace? What independent businesses will I compete with? What other franchises? How does this business compare? How can I attract customers away from competitors?
  • Will additional competition enter the market? Is it likely that competitors will consolidate?
  • Who are the current customers of the business? How long have they been customers? Why do they buy from this particular business? What is likely to have an impact on their needs for my products/services in the future?
  • How might the customer base expand or contract? Who are some potential customers? Is there an untapped market? What about this business will attract those customers?
  • Would the current owner be willing to work for a period to transition the customer base and help drive continued growth?
  • How important is the exact location of this franchise? What does the franchiser recommend? Will I be able to get a location that suits both me and the franchiser? Will it be near my current residence?

Additional resources

Links

Books

Link to comment
Share on other sites

Senior Operative

Senior Operative

  • [1] JUNIOR ENLISTED

Buying a Business or Franchise (Step 9): Complete Research on the Franchiser

Goal: You’re convinced that this business is for you, or you move on to candidate #2.

Your relationship with a franchiser is that of a business partner, and both partners are essential to the success of the business. You need to know as much as possible about the franchiser and the specific agreements involved. You’ll want to research companies and research people.

To begin building a serious relationship and get the franchiser’s cooperation in sharing additional data, you will want to submit a preliminary franchise application. Then both you and the franchiser can evaluate whether this will be a good partnership.

At this point, review everything you know about the franchiser in preparation for talking to them. Reread all of the franchiser’s materials and review all of your notes on your investigations. Pay particular attention to three areas: financial (fees, expenses and financing), franchiser support (what you get for your money, such as the site selection, equipment, systems, purchasing power, training, manuals, advertising) and contracts (the agreement they propose to make with you). As you do this review, make a list of items or outstanding issues you want to discuss with them.

Next, contact the franchiser and begin the discussion. You can start on the telephone, but sooner or later you will want to meet with the corporate leaders (not just a single regional representative) to ask questions and to get a feel for who they are and how they think and act. An in-person meeting will reveal things about the character of a company that can’t be discovered any other way.

If you are near the franchise headquarters, visit it. If it’s a long trip, you will have to decide if it’s worth the time and expense at this stage. But in our view, before forming a partnership, potential partners should spend some face-to-face time together.

Questions to ask

  • Do I have complete and accurate picture of the franchiser?
  • Do I have a comprehensive picture of how the franchise business operates? Have I thoroughly studied the financial arrangements proposed by the franchiser? Do I understand what I need to invest and what I will get in return?
  • How will the franchiser support me and the business? Have I talked with actual franchise owners to ensure that claims made by the franchiser are fulfilled?
  • What’s the quality of their training materials? What’s the quality of their operating manual? Is it comprehensive for running a business? How accessible is the franchiser to help solve problems (toll-free number, quick turnaround on e-mail, etc.)?
  • Have I reviewed the contracts? Do I understand the agreements? Do I understand the commitments and obligations being made on both sides of the relationship? Has the franchiser made any verbal representations or agreements that are inconsistent with documents such as the UFOC or contracts?
  • Have I met with the corporate leadership? What was my impression? Are these people I can trust? Am I comfortable being in business with them?
  • What restrictions does the franchiser impose in the event I want to dispose of the business? Can I sell the business back to the franchiser? Can I sell the business independently?

Additional resources

Links

  • Standard & Poor’s — independent credit ratings, risk evaluation, investment research, data, and valuations. May be available at your local library for free.

Books

Link to comment
Share on other sites

Senior Operative

Senior Operative

  • [1] JUNIOR ENLISTED

Buying a Business or Franchise (Step 10): Price the Business

Goal: Develop a realistic and fair price for the business.

There are a number of ways to determine the value of a particular business. Although many things come into play when determining pricing (such as tangible assets, inventory, current orders and market position), the key factor is almost always historic and projected cash flow. In order to come to a fair determination of value, you must be thoroughly familiar with the cash flow analysis, along with the assumptions on which those projections were based.

It is also important to try to find out what comparable businesses have sold for recently. This can be difficult because a business that may appear similar may have hidden assets or liabilities. You may also have difficulty getting reliable information. Still, it’s worth checking them out to the extent possible. Your board of advisors might introduce you to some informed sources.

The structure of the sale is critically important. There are two typical structures: asset and stock. The two arrangements have different obligations and tax consequences for seller and buyer, and the choice is also predicated on how the business is legally structured. If you don’t have experience in this regard, you will certainly need professional advice.

Another common element of structuring a sale is an "earn-out." Particularly useful in the acquisition of a service business (or any business significantly dependent on the owner), this arrangement calls for the payment of an initial lump sum together with a percentage (or multiple) of the profits for a time period (for example, two years) after the sale. In this way, the owner continues to work for the business during the transition period, with the ultimate purchase price determined by financial results over that time. Of course, you and the current owner would have to agree on his/her involvement over that period.

Pricing the business

Questions to ask

  • What pricing methods will I use to determine a price? Do I know what comparable businesses have sold for recently?
  • What are the tangible elements of value (such as equipment, inventory, and real estate)?
  • What are the intangible elements of value (such as name, reputation, and customer base)?
  • How does the historic and projected cash flow of the business have an impact on its value?
  • Am I aware of the tax and legal issues involved in different financing options?
  • What role will the seller play in building the business after the sale, or do I want his/her involvement to end there?
  • What financing may be available from the seller?

Additional resources

Links

Books

Link to comment
Share on other sites

Senior Operative

Senior Operative

  • [1] JUNIOR ENLISTED

Buying a Business or Franchise (Step 11): Write a Business Plan

Goal: Three tough-minded advisors test your assumptions and give you the OK.

A good business plan is essential if you want to secure any type of financing from investors or lenders. It is also very useful in deciding whether to go ahead with the acquisition and in mapping the future if you do. Also, when buying a larger or existing franchise business, you may be asked by the franchiser to share your plan for the business.

Writing a business plan ensures that you have thought through the major issues and established steps for building the business. You need to demonstrate to yourself and to your advisors that you have a good understanding of the business and how you will manage it and grow it over time. In addition, the exercise of writing a business plan will probably make you a better negotiator when you want to close the deal.

This step should not be too difficult at this point, as the research and analysis you have already conducted will prepare you to put it together.

Trust us — you need a business plan.

There are many print and electronic sources available, including actual plan templates, and you may want to review them. Here are some standard elements of a business plan you can construct on your own:

  • Statement of purpose
  • Description of the business or franchise
  • Product/service descriptions
  • Market analysis
  • Competitive analysis
  • Marketing and sales strategies
  • Operations
  • Risk analysis
  • Organizational structure
  • Management and personnel
  • Facilities and equipment
  • Research and development
  • Actual and proposed sources of funding (including terms and rates)
  • Financial plan (including projections of revenues, expenses, royalties, profit, cash flow)

Once again, do not simply rely on the franchiser’s material; use your own independent research. You might mostly use the franchiser’s material for description of the franchise business and the marketing and sales strategies. You should develop management team, funding, and financial sections yourself. The market and competitive analysis might be a combination of their material and yours.

At this point, it will be difficult for you to stay entirely objective about the prospect of buying this business and making it work. You’ve put a lot of time and energy into it. That’s why you now need an objective review of your plan by at least three of your advisors.

You’ll now want to schedule appointments with your board of advisors.

Questions to ask

  • Who, specifically, on my board of advisors do I want to evaluate my plan?
  • What resources (Internet or printed word) can I use to put together my plan? (See list of suggestions below.)
  • Who might I ask to strengthen my ideas and plans (perhaps before a rigorous review)?
  • What questions do I want to ask them? Where do I probe?
  • Am I prepared to deal with their honest assessment? How can I guard against my own defensiveness?

Additional resources

Resources at no charge

Resources for a fee

  • These business plans available on E-Notes.com require an "E-Pass" of $9.95 a month or $49.95 one time charge.
  • Business Plan Pro is the leading software for creating business plans and comes with over 500 sample plans. Palo Alto Software is also the leading supplier of sample business plans to a number of sites on the web, including the Small Business Administration, Inc.com and Entrepreneur.com The cost is $99.99 or $199.95 for the deluxe edition.
  • Automate Your Business Plan by Linda Pinson, author of the SBA’s guide to writing a business plan. Download, or order, with or without the book Anatomy of a Business Plan as well as templates, charts and spreadsheets to create detailed business plans. $80 for software alone. $90 or $95 with the book.

Books

Link to comment
Share on other sites

Senior Operative

Senior Operative

  • [1] JUNIOR ENLISTED

Buying a Business or Franchise (Step 12): Make the Initial Offering, Buying a Business

Goal: Your advisors sign off on your offer, and you submit it.

If buying a franchise, please skip to Step 14.

To make a good initial offer, you have to figure out what the seller really wants and will accept. You have probably picked up numerous clues on this along the way.

Some sellers may want to get a high price for the business up front, while others may want a gradual stream of income after the sale. Some sellers may want to get out of the business completely and move on, while others may want continued employment for themselves, family members or friends.

Find out the seller’s expectations on financing. For instance, in the sale of small businesses, one common structure is for the seller to accept a down payment and hold the promissory note for a period of five to ten years, receiving monthly payments from the new owner.

A seller’s willingness to hold part of the long-term debt — or to accept an earn-out arrangement — could be a sign of the seller’s optimism about the future of the business. Reluctance could be a red flag.

Knowing what the seller wants and will accept will help you determine how to best structure the offer and anticipate what issues may arise in negotiations.

Your offer should lead to negotiation. It must clearly define what you are buying, such as equipment, property or lease, and include any contingencies, such as having your accountant confirm the accuracy of the financial data and your ability to get financing.

Once the offer is made, you must be given access to all financial data, tax returns, contracts and other information relevant to the business. These are essential in developing the final offer.

You’ll now want to prepare your initial offer.

Questions to ask

  • What does the seller really want? What are his/her stated and unstated goals?
  • Does the seller have specific ideas about how the sale will be financed?
  • Will the seller accept a cash down payment and carry a note for the remainder of the purchase?
  • What financial documents can the seller provide? What type of documentation do I need for the buyer’s financial package?
  • What is the seller’s bottom line price based on desired financial arrangements?
  • What specific assets am I buying? What liabilities am I assuming?
  • Will I have clear title to the business?
  • Are there any contingencies that must be met before closing the sale?

Additional resources

Links

Books

Link to comment
Share on other sites

Senior Operative

Senior Operative

  • [1] JUNIOR ENLISTED

Buying a Business or Franchise (Step 13): Complete Due Diligence

Goal: Get satisfactory evidence of the hard facts of the business.

As a general rule, final due diligence can’t be completed until after an offer is made. However, by the time you get here, you’ve already done considerable preliminary due diligence. Now you need evidence that important preliminary information is accurate and correct.

As mentioned earlier, your initial offer will be contingent on a number of factors, including a thorough review of all financial data, customer contracts, and other relevant information. You now insist on full disclosure about the business.

It’s now critical to have experienced professionals assess the financial and legal health of the business to prevent surprises down the road. The key here is not simply to evaluate revenue, expenses, profits and cash flow, but to explore all assumptions underlying the business and its continuing viability.

You will also want to anticipate any future obligations or liabilities that may have an impact on profitability. For example, future projections might be rosy, but you see that the business is way behind in its use of new technology. Be sure that expenses to upgrade are figured into the financials.

Now is the time to check and confirm the information you uncovered in your preliminary due diligence. Validating that everything you have received (or put together on your own) is accurate and complete can avoid serious problems in the future.

In some cases, comprehensive background checks are conducted on the owners, management and key personnel to ensure that they are representing themselves fairly. The seller may conduct similar checks on you and your investors. Nobody wants unpleasant surprises. Once everything checks out, it is time to complete the negotiations and close the sale.

Make sure your due diligence is thorough.

Questions to ask

  • Do I have a comprehensive picture of how the business operates?
  • Do I have an understanding of the market, historic and projected trends in the market, the competitors, and the organization’s competitive advantage?
  • Do I understand the historic and projected financials of the business (revenue, cash flow, assets, liabilities)?
  • Have I reviewed my business plan, examined and tested the underlying assumptions, and feel confident that the projections are accurate?
  • Do I have an attorney experienced in business sales to advise me?
  • Do I have an accountant experienced in business sales to advise me?
  • Do I have access to (and an understanding of) all contracts and obligations of the business?

Additional resources

Links

Books:

Link to comment
Share on other sites

Senior Operative

Senior Operative

  • [1] JUNIOR ENLISTED

Buying a Business or Franchise (Step 14): Negotiate and Close the Sale

Goal: You’re the proud owner of your own business.

Typically, the initial offer is not immediately accepted by the seller. (If it is, it might have been too high.) Generally, the seller will make a counteroffer, and a period of negotiating begins as you both strategize to close the gap while still meeting each other’s key objectives and expectations.

While you are working on closing the sale, and continuing to check out all of the detailed financials (or waiting for your financing to come through), you must keep an eye on the business to ensure that all is in order. With the current owner distracted by the selling process, you want to be sure the customers are not being deprived of their customary good service or that the employees are not becoming demoralized because of anxiety surrounding a change in ownership.

You must also keep an eye on your financial package. Every change you negotiate with the seller can have an impact on your investors or lenders, so make sure you keep them informed of any major changes.

Closing the sale of even a very small business is complex. It has so many factors and contingencies, and so many documents and contracts passing from one owner to the next, that it is unrealistic to expect that nothing will ever get held up or go wrong.

It’s important that you remain objective and clear headed. You may have found the right business, but you must also obtain the right price and the right terms.

By now, you have made a significant emotional and time investment and things can get tense. But if you stay focused and listen to the advice you get from your advisors, you will successfully conclude the right purchase.

Congratulations to you!

Negotiating and closing the sale

Questions to ask

  • Judging by the initial response to my offer, what does the seller really want? What do my advisors say about the counteroffer?
  • What terms will satisfy both me and the seller? Under what circumstances would I be willing to walk away from the deal?
  • Has the business changed since I began assessing it?
  • Have I considered my exit strategy for what I will eventually do with the business? Sell it? Close it? Leave it to my children? Take it public?
  • Is my financing still in place? How will any changes in the offer affect my financing?
  • Am I prepared with the documentation and checklists I need to ensure that the closing will go smoothly?
  • What is my transition plan to get my new relationship in the business (with customers, employees, vendors, banks, etc.) off to a smooth start?

Additional resources

Links

Books

Link to comment
Share on other sites

Senior Operative

Senior Operative

  • [1] JUNIOR ENLISTED

Buying a Business or Franchise (Step 15): Buy the Franchise

Goal: You’re the proud owner of your own franchise.

As mentioned previously, franchiser financing may be an alternative to borrowing from lenders or seeking investors. Nearly one in five franchisers offers some kind of financing. Some will finance the entire investment, others just the initial fee.

If you wish to use franchiser financing, the details of those arrangements will be part of the franchise purchase agreement.

Questions to ask

  • If the franchiser offers financial assistance, are they willing to finance the entire investment? If not, what portion? Are they willing to finance the working capital amount?
  • How much time will I have to repay the franchiser? Is that period within the term of my franchise?
  • If the franchiser will finance the purchase, will I have to put up any collateral outside of the business? If I default on my loan payments, will I be in violation of the franchise agreement?
  • Will I need additional financing? If so, how much? Who will provide it?

If the franchiser does not offer full financing (or if you can get better rates and terms elsewhere), you need to sew up firm commitments on your financing before submitting your purchase offer.

Once your financing is in place and you have reviewed the arrangements with your attorney and financial advisor, you are ready to close the deal. Clarify how much you are paying for each aspect of the business: the license, materials and supplies, equipment, and property or lease, if that is part of the deal. Then prepare and submit your purchase offer.

Once you have shown yourself to be a desirable franchisee, you may find that there is considerable room for negotiation on financing (if offered) and the elements mentioned in the preceding paragraph.

Congratulations to you!

Questions to ask

  • What documents do I need to gather in order to assemble the financial package?
  • What documents will the franchiser supply to me, or to my lenders and/or investors?
  • Does the franchiser provide a format or guidelines for the purchase offer? If not, can I get some sample submissions from them?
  • Have I negotiated terms which I consider fair?
  • Am I comfortable with the way the franchiser has handled negotiations? Have they been forthcoming and honest with me?
  • Are there any contingencies to be built into the offer so that I can be certain that all issues are resolved before the sale closes?

Additional resources

Links

Helpful articles from Bison.com Franchising Network

Helpful articles from AllBusiness.com

Link to comment
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now
 Share

×
×
  • Create New...