Owning a Franchise is Risky Business. Know What You’re Doing.
Owning a franchise is a major life decision. While every industry has its tricks of the trade, franchising is in a league of its own. In fact, the franchise buyer who’s an outsider is faced with one of the most daunting tasks on the planet.
Buying a house or a car is intimidating for most people, especially the inexperienced, but the decision to buy a franchise comes with a very different set of problems than a mere house or car. Here’s why buying houses and cars are child’s play in comparison buying and owning a franchise.
Shopping For a House Vs. Shopping For a Franchise
If you’re in the market for a home, most likely you’ll make contact with one or more agents. That’s an obvious starting point. The agent meets with you, reviews your wants, your finances and your timing, and if there’s a good personality fit you start looking a property search.
Now, let’s assume that your agent is not terribly competent or forthright? If that’s the case, you have different levels of protection. First, unless you are paying cash for the property, a lending company would evaluate its worth. The lender will also take a hard look at you, the buyer. If the payments are out of reach, you won’t get the loan. Next, you’ll most likely want a property inspection. So there are three levels of protection above and beyond the agent. And of course, before closing, a title review will be conducted. None of these protections are in the hands of the agent.
Why Owning a Franchise Is So Fraught With Danger (First Time Buyers Beware)
Buying and owning a franchise is very different. A quality system of checks and balances are not present. Or at least not so reliable as when buying a house.
Let’s start with the franchise broker, a person similar to the real estate broker. Unfortunately the broker will most likely call themselves a franchise consultant. So for openers you are led to believe this is a consult, not a salesperson. If you want to own a franchise, you must know the difference. Just as the real estate broker earns a commission when you buy a house using their services, the franchise broker earns a commission if you buy one of their listings (a franchise they represent). How much you want to believe you’re well being is the only factor present is entirely up to you, but loyalty goes to the entity paying one’s salary. And when using a franchise broker, the one writing the check is the franchise company if you buy their offering.
Next, consider disclosure documents. In 1979 the FTC first enacted protections for franchise buyers in the form of an offering circular disclosing certain facts about the franchise. These disclosure documents followed a particular format that described issues such as costs, franchise ownership and management, terms and conditions and so on. Unfortunately, very few read them, or if they did, they didn’t understand them. Being handed franchise disclosure documents never ensured that they were being examined. Whether in the past or today, buyers simply do not perform proper franchise due diligence. Once again, when buying a house, the lender and its representatives research the fine print. But a person can own a franchise and never be aware of its terms or conditions.
None of this is to say that franchise buyers don’t perform a certain amount of due diligence. But it is to say that they don’t perform ‘proper’ due diligence. Many buyers retain a business or family attorney for contract and document review when they buy a franchise. That sounds good, right? Not really. Franchise law is a very specialized practice and your local business or family law counsel isn’t up to speed. Second and more important is the nature of the concept. If you buy a franchise because the contract and its representations seem to be in order legally, that says nothing about whether the franchise concept is worth a darn. A legally worthwhile piece of paper doesn’t mean that what you’re buying is worthwhile. For the vast majority of buyers, the real truth about owning a franchise are not revealed until their fully in business.
The only way to buy a franchise with a fair degree of confidence is to understand yourself, understand what you’re buying, and know whether or not those two elements match up.
Thorough franchise due diligence is the key; due diligence that goes far beyond salesmanship, numbers and contracts. No, this isn’t a cheap plug for due diligence services. It’s a legitimate calling to buy a franchise with and for all the right reasons. The only way to buy a franchise with confidence its to know what is good for you and then find the people and the concept that offer that marriage. Franchising has always been and will always be, a salesman’s dream, because dreams can be sold. Don’t be sold, be educated. Get competent help that’s loyal to you and your needs.