Here is the franchise buying advice you asked for
Every business or industry has what we commonly refer to as ‘tricks of the trade’ and franchising is no different. But the outsider planning to buy a franchise is facing one of the most daunting purchases on the planet. For those who have requested franchise buying advice, here are some initial thoughts.
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.
If your in the market for a home, most likely you’ll contact an agent or several. That’s an obvious and good starting point. The agent meets with you, reviews your wants, your finances, your timing, etc. and, if there’s a good personality fit, you start looking at logical properties together. So far so good. Now, what happens if you happen to have chosen a less than competent or forthright salesperson? Or, what happens if your salesperson is also the person who listed the property for sale? Do you think there might be a little more incentive for encouraging you to buy that house? Human nature would probably bend in that direction because a greater commission would come from selling their own listing, right? Now, regardless of how you happen to fall in love with a property, let’s assume that happens and you’re ready to move forward. Unless you’re writing a check for the whole amount and also willing to forgo normal investigation, you’ll be helped with legal and financial checks and balances. For example, the lender will be examining your credit and ability to pay the note. An attorney will be tracing validity of the deed being transferred, and a home inspection will take place to ‘objectively’ point out potential surprises. In other words, there’s a routine ‘system’ in place designed to watch over and guide your actions.
But what checks and balances are present when you buy a franchise? No nearly as many (or as solid) as when buying a house.
Let’s start with the franchise broker (similar to the real estate broker) who unfortunately is often self-titled as franchise consultant. 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). There will be all manner of “yes, our consulting is free to you in order to learn about different opportunities”. It doesn’t matter how much you want to believe you’re well being can be trusted in the hands of a broker, loyalty goes to the person signing the pay check and in this case, it’s the franchise company. And unlike a home purchase, there is no home inspection. If you’re sold on the franchise, you’ll probably buy it and find the termites later on.
Next, consider disclosure documents. In 1979 the FTC first enacted protections for franchise buyers in the form of ‘the franchise rule’ and required offering circulars be given to prospective buyers before a purchase was finalized. These disclosure documents followed a particular format that described a great deal about the franchise, its costs, its ownership and management, terms and conditions and so on. Unfortunately, very few read them, or if they did, they didn’t understand them. The language may not be in ‘fine print’ but buyers have little ability to interpret what they read (or skimmed) anymore than home buyers understand the mountain of documents they sign at closing.
Many people 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 attorney 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.
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 a good 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.