Considering buying a franchise?
Franchising is complicated. As such, it’s important to understand why you should use a franchise consultant instead of handling it all by yourself. To illustrate, let’s draw on some similarities between buying a franchise and buying a home.
People make very few large financial decisions in their lives. They may buy a few homes, but typically that’s just about it. According to the 2010 US government census the average home in the US sold for $272,900. Lending Tree data shows the national average for a home loan in 2011 was $222,261 with a $1,061 average monthly payment for a 30-year mortgage at 4 percent. Statistically in this case, the average cash down payment would be over $50,000. According to the National Association of Realtors, agents or brokers are used in over 90% of all transactions.
The average cost to buy and set up a franchise will vary widely from under $50,000 to well over $1MM. The total cost of a typical franchise in my portfolio can run from $100,000 to $400,000.
Many franchises require a cash expenditure of between $50,000 and $100,000.
This is very similar to a home purchase, but with a much greater degree of risk. Businesses close every day for a myriad of reasons; poor management, poor location, major market shifts, lack of operating capital or even poor business planning. A home purchase has historically been a very wise and solid investment. According to the latest small business data the 5 year survival rate for the average small business is only near 50%. The current foreclosure rate, even in today’s economic climate, is 1 in 775 households.
So, if you use a real estate agent to sell your home, why not use a business consultant to buy a business?
Real estate agents and brokers provide value in the sales process. They narrow the search by selecting homes for the buyer to visit within the buyers established parameters for size, features, neighborhood, price, school systems, etc. They work to pre-qualify the buyer so that the sales process runs smoothly and the sellers are speaking only with qualified buyers. The best part is that the cost of the home is typically not affected by the broker’s fee for adding value to the process. The brokers are paid only if a sale is transacted and paid by the seller for successfully matching buyer and seller.
A franchise consultant provides a similar service at no cost to the franchise buyer.
The consultant pre-qualifies the buyer while assembling a financial and personality profile. Next, the consultant scours their franchise portfolio to find a selection of business opportunities within a defined set of parameters, all set by the buyer. The consultant then runs an analysis for unit level economics, value for ongoing fees paid and culture fit.
Due to the high risk factor, the franchise sales process is highly regulated by the FTC.
A good franchise consultant helps the buyer navigate the lengthy and arduous task of analyzing the Federal Disclosure Document (FDD). A typical FDD document may be over 200 pages. Next, the franchise consultant facilitates validation: the process of interviewing existing franchisees. Like buying a home, the more due diligence performed in the buying process, the greater the likelihood for success. And, as in a real estate transaction, the price of the franchise is not affected by the broker’s involvement. Finally, similar to real estate, the consultant/broker is paid by the seller and only if a final sale is transacted.
So, the moral here is: don’t try to do it on your own. The average franchise term is 7 to 10 years and the agreement is written to the advantage of the franchisor (not to mention the fact that it is extremely difficult to get out of.) Ask for professional help in one of the most critical financial decisions of your life.