Franchising is another great path to business ownership, offering a great new opportunity somewhere in the middle of a new business start-up and the purchase of an existing business. Here are the advantages and disadvantages you could experience when buying a franchise.
Advantages of Buying a Franchise
The business is already formed - the planning is done
Reduced risk - the concept has been tested and proven
Turn-Key Operation – the franchisor helps you find and choose a location, hire employees, market yourself, etc…
Standardized Operating Procedures – Training programs in place for all employees from entry level to upper management
Collective Buying Power – 90% of your supplies, inventory, uniforms, etc…are purchased through your franchisor who is buying in bulk and passing savings on to you
Research and Development – the franchisor decides when to introduce new product lines or offer promotional discounts while you focus on operating the business
Supervision and Consulting – The franchisor provides training and supervision while you’re getting established.
The franchisor wants you to succeed; he gets paid royalties based on your success. A good franchisee will provide the training and support you need to ensure you will show succeed and generate a good profit.
Disadvantages of Franchising
Loss of Control – You must do everything exactly as you’re told to do it. You are not authorized to change policies and procedures; you cannot decide when to introduce new products or offer promotional discounts. The franchisor makes all the rules and you must follow them; the franchisor is to you as a boss is to an employee.
Binding Contract – You’re all-in! Franchisees do not operate independently; they all do the same thing, the same way. This consistency is most beneficial to the customers as they know what to expect no matter what location of the franchise they visit, no matter what state, county or city. They know that whatever they order will be the same size, prepared the same way, and packaged the same way.
Franchise Problems become Your Problems: If one franchisee in your particular franchise has a problem, for instance, a lawsuit that becomes nationally known. For example, ABC Chicken, in one location, is sued when a lot of people are sick with food poisoning. The news quickly travels across the US and you find your revenues slipping. No one wants to risk going to ABC Chicken; they don’t even consider that this is likely an isolated occurrence.
Cost Associated – The initial franchise fee, which is the cost of your rights to sell their product, can be anywhere from a few thousand to over $1 Million, depending on the franchise. This fee may not cover other start-up costs, operating capital, the upcoming payroll, beginning inventory and more. You also might be required to purchase or lease a certain location; one that is a prime location in your area; therefore, being sold at a high cost. You may be independently responsible to buy signs, fixtures, etc… as well.
When franchises are operating well, everyone does well. When there are problems, all the franchisees can suffer. Though a lot of the risk potential is reduced, there are still possible risks to consider when deciding to buy a franchise.
Bill Bartmann covers the paths to business ownership and the advantages and disadvantages to each. His online course, Billionaire Business Systems, has guided many entrepreneurs to great success in their business ventures.
Tuesday, March 17, 2009
Bill Bartmann on Due Diligence Questions to ask when Buying a Business
Entrepreneurs must perform their due diligence before buying an existing business. Be sure to think your way through everything you need to understand before making this commitment.
Why is the business for sale? You must get an answer that you feel is credible. You have the right to be skeptical; do not think you have to accept the first answer you hear.
What is your general perception of the industry? Your intent will be to increase the volume of the business. Has anything happened to have an adverse affect on the demand for your business or service? Think beyond the history and think of the future in the company. Can this business grow?
Is this company one of the better ones in the industry? When you purchase an existing business, you inherit the business, the customers and the reputation; you become what is seen through the eyes of the consumer.
What is the long term outlook for the industry that you are going into? Are they soon to peak and then fall? Where is this industry, in the market trend; are they on the rise or is the demand declining?
Consider competition; what are your competitors doing? Is the level of competition in this field or industry increasing or decreasing in your target market area?
More Due Diligence Work before Making the Final Decision:
Interview some of the customers. Ask for their customer list so you can randomly choose customers from their list, rather than allowing them to give you ones that are likely to say only positive things. You might be required to sign a non-solicitation agreement promising that you will not solicit their customers for your business if you choose not to buy their business.
Are they a member of the Better Business Bureau? If not, chances are there is a reason they don’t want to be. This could well be a big red flag. The Better Business Bureau will provide reports of complaints made against the business. Most businesses will get some complaints; look at how the complaint was handled and if the problem was resolved.
Check with trade associations to see if they have heard anything about the company you’re buying. Find out what they know about the company’s reputation. Chances are, they will only know something if the company is very good or very bad.
Research your Competition
This research takes time and energy, but what you learn will be powerful. Find competitors who have failed and find out why they failed. This information will help you to avoid making the same mistakes. Find some who have been successful and find out why, to get some great tips on being successful yourself.
Financial Due-Diligence
Gather financial information; ask for financial statements, Cash flow Reports, P & L Statements, Balance Sheets, etc…Consult a CPA or expert on analyzing financial data if you are not skilled in accounting. Their opinion as to the financial condition of the company you are considering buying is important to you.
Ask to see their recent tax returns. If they try to tell you they are making more than they are reporting, they are not saying a lot about their character. If they say they’re dishonest with the IRS, who’s to say they’re being honest with their customers and with you? Remember, you are buying the business based on official financial reports, not the extra benefits or income stated by the owner.
Inventory Practices
Understand whether or not there is excessive inventory; this looks like an asset, but could be a liability because now you have inventory which you must sell. Is the inventory obsolete?
What do you believe is the lowest level of inventory you can maintain and still run your business? You must have adequate inventory to meet customer demand, but not so much that you have trouble unloading it. Being able to run on a low level of inventory can be an asset to a business; just-in-time inventory is a business concept where you only have as much as you absolutely need to have on hand at any given time.
Having too much inventory on hand means too much cash is tied up here and the inventory takes up space. Having too little inventory means not being able to fill orders and losing sales.
The Value of Accounts Receivable
Accounts receivable are rarely worth their face value; many are from people who cannot pay; they made the agreement when they were able to meet their obligation, and then things changed. Do not pay 100 cents on the dollar for accounts receivable. The price for the accounts receivable should be discounted according to how long the accounts have been aging.
Your Cash Investment
How much do you need to operate your business? Be careful to be sure you have the money to cover the upcoming overhead, including payroll, accounts payable and all operating expenses for at least the next three months. Expect a revenue dip during the first 90 days of acquiring the business.
Liability Insurance
Assume their liability insurance in case there is a pre-existing situation that may result in future litigation. A new insurance company is only obligated to cover you from the time you purchased the business. If there was a problem before, for example, someone was hurt before you purchased the business, maintaining the same policy with the same company will ensure that you are covered if they should sue. Do not be too quick to change companies even if you can get cheaper insurance; the additional cost of premium is well worth avoiding the risk.
What else should be Included in the Acquisition?
Be sure you get the websites, phone numbers, logos and trademarks that exist within the company. Otherwise, the former owner keeps the phone number and all your customers continue to call them instead of you!
Don’t be Afraid to Hire a Professional Consultant
Buying a business is a huge investment. There are financial and legal issues understand and analyze. No matter how much research you have done and no matter how much you may think you know there are likely things you are not aware of; things you haven’t considered.
Are there any legal issues to be aware of? Pending Litigation? Has there been an audit recently? This information will be shown in the footnotes on the financial statements. A professional knows what to look for and how to find it.
A good professional advisor, such as an attorney or a CPA will help you avoid missing something critical that should be included in the purchase of the business. They are professionals at gleaning financial data and analyzing legal issues that you may have no idea even exist.
You will make the final decision as to whether or not to buy the business, based on your own research and the opinion of one or more professional business consultants. Your due-diligence is your advance preventative medicine; hiring a consultant will save you a great deal of money while preventing you from making a very costly mistake.
Bill Bartmann offers very detailed due-diligence advice in his online course, Billionaire Business Systems. This course covers financial and legal issues of starting, owning and operating a business. To be successful in business and to avoid the most commonly made mistakes and pitfalls of business ownership, check out Bill Bartmann’s course at http://www.billionaire.com
Why is the business for sale? You must get an answer that you feel is credible. You have the right to be skeptical; do not think you have to accept the first answer you hear.
What is your general perception of the industry? Your intent will be to increase the volume of the business. Has anything happened to have an adverse affect on the demand for your business or service? Think beyond the history and think of the future in the company. Can this business grow?
Is this company one of the better ones in the industry? When you purchase an existing business, you inherit the business, the customers and the reputation; you become what is seen through the eyes of the consumer.
What is the long term outlook for the industry that you are going into? Are they soon to peak and then fall? Where is this industry, in the market trend; are they on the rise or is the demand declining?
Consider competition; what are your competitors doing? Is the level of competition in this field or industry increasing or decreasing in your target market area?
More Due Diligence Work before Making the Final Decision:
Interview some of the customers. Ask for their customer list so you can randomly choose customers from their list, rather than allowing them to give you ones that are likely to say only positive things. You might be required to sign a non-solicitation agreement promising that you will not solicit their customers for your business if you choose not to buy their business.
Are they a member of the Better Business Bureau? If not, chances are there is a reason they don’t want to be. This could well be a big red flag. The Better Business Bureau will provide reports of complaints made against the business. Most businesses will get some complaints; look at how the complaint was handled and if the problem was resolved.
Check with trade associations to see if they have heard anything about the company you’re buying. Find out what they know about the company’s reputation. Chances are, they will only know something if the company is very good or very bad.
Research your Competition
This research takes time and energy, but what you learn will be powerful. Find competitors who have failed and find out why they failed. This information will help you to avoid making the same mistakes. Find some who have been successful and find out why, to get some great tips on being successful yourself.
Financial Due-Diligence
Gather financial information; ask for financial statements, Cash flow Reports, P & L Statements, Balance Sheets, etc…Consult a CPA or expert on analyzing financial data if you are not skilled in accounting. Their opinion as to the financial condition of the company you are considering buying is important to you.
Ask to see their recent tax returns. If they try to tell you they are making more than they are reporting, they are not saying a lot about their character. If they say they’re dishonest with the IRS, who’s to say they’re being honest with their customers and with you? Remember, you are buying the business based on official financial reports, not the extra benefits or income stated by the owner.
Inventory Practices
Understand whether or not there is excessive inventory; this looks like an asset, but could be a liability because now you have inventory which you must sell. Is the inventory obsolete?
What do you believe is the lowest level of inventory you can maintain and still run your business? You must have adequate inventory to meet customer demand, but not so much that you have trouble unloading it. Being able to run on a low level of inventory can be an asset to a business; just-in-time inventory is a business concept where you only have as much as you absolutely need to have on hand at any given time.
Having too much inventory on hand means too much cash is tied up here and the inventory takes up space. Having too little inventory means not being able to fill orders and losing sales.
The Value of Accounts Receivable
Accounts receivable are rarely worth their face value; many are from people who cannot pay; they made the agreement when they were able to meet their obligation, and then things changed. Do not pay 100 cents on the dollar for accounts receivable. The price for the accounts receivable should be discounted according to how long the accounts have been aging.
Your Cash Investment
How much do you need to operate your business? Be careful to be sure you have the money to cover the upcoming overhead, including payroll, accounts payable and all operating expenses for at least the next three months. Expect a revenue dip during the first 90 days of acquiring the business.
Liability Insurance
Assume their liability insurance in case there is a pre-existing situation that may result in future litigation. A new insurance company is only obligated to cover you from the time you purchased the business. If there was a problem before, for example, someone was hurt before you purchased the business, maintaining the same policy with the same company will ensure that you are covered if they should sue. Do not be too quick to change companies even if you can get cheaper insurance; the additional cost of premium is well worth avoiding the risk.
What else should be Included in the Acquisition?
Be sure you get the websites, phone numbers, logos and trademarks that exist within the company. Otherwise, the former owner keeps the phone number and all your customers continue to call them instead of you!
Don’t be Afraid to Hire a Professional Consultant
Buying a business is a huge investment. There are financial and legal issues understand and analyze. No matter how much research you have done and no matter how much you may think you know there are likely things you are not aware of; things you haven’t considered.
Are there any legal issues to be aware of? Pending Litigation? Has there been an audit recently? This information will be shown in the footnotes on the financial statements. A professional knows what to look for and how to find it.
A good professional advisor, such as an attorney or a CPA will help you avoid missing something critical that should be included in the purchase of the business. They are professionals at gleaning financial data and analyzing legal issues that you may have no idea even exist.
You will make the final decision as to whether or not to buy the business, based on your own research and the opinion of one or more professional business consultants. Your due-diligence is your advance preventative medicine; hiring a consultant will save you a great deal of money while preventing you from making a very costly mistake.
Bill Bartmann offers very detailed due-diligence advice in his online course, Billionaire Business Systems. This course covers financial and legal issues of starting, owning and operating a business. To be successful in business and to avoid the most commonly made mistakes and pitfalls of business ownership, check out Bill Bartmann’s course at http://www.billionaire.com
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