I currently have two customers that are at different stages in buying a Franchise. They have asked me for my opinion on the purchasing and financing of the businesses. One customer is buying a Franchise that has been in operation for almost two years, so they’re purchasing from the Franchisee. The second customer is buying the Franchise from the Franchisor. This involves determining the location, rental agreement, leasehold improvements, purchasing equipment, computers, software, hiring etc., before the doors are even opened. Despite the differences there are numerous issues in common that they need to consider. Buying a Franchise? Then read on to see these 4 key financial considerations.
1. Foreign Exchange Rates
Both Franchisors’ head offices are based in the United States. Purchasing the equipment must be made in the United States and some monthly fees are also in U.S. Funds. Right now this involves a 35% exchange rate. Unless you’re a McDonalds or Tim Hortons Franchise there is not a lot of profit margin to absorb that type of exchange rate.
2. Existing Financial Statements
Current financial statements for these established businesses don’t make sense. The statements for the first year are drafts. No final statements for the year have been supplied and no Notice of Assessment is available. It appears once the current owners determined they wanted to sell the business, income increased and wages decreased. And the owners don’t work in the business. Certain necessary monthly expenses are not appearing on the interim Profit & Loss statement. The Balance Sheet only provides more unanswered questions. You may not be a numbers person but you will need to know what the amounts represent, and whether they are indicative of the margins the Franchisor told you to expect. Also understand as a new Franchisee how the Franchisor determined the great profit margins they are selling you on.
3. Inflationary Costs
Negotiations for the new Franchisee started months ago, and budgets were established at that time. Now the Franchisor has determined they want a face-lift or upgrade for all their Franchise locations, which has created an almost 10% increase over the original budgeted amount. My customer has too much invested now to bow out, but at the same time doesn’t know if they have enough financing in place. I have not read the Franchise agreement for this company so I can’t express an opinion on whether this was included.
4. Exclusive Negotiations
Establishing an exclusive negotiating relationship is important. When purchasing a business a lot of time and expense is involved. Make sure in your offer that it states that the Seller is dealing with you only as a potential Purchaser, for a specific period of time. There is nothing worse than having the carpet pulled out from under you when you’re told somebody came in with a better offer, and it’s SOLD!
I’ve dealt with numerous Franchisees over the years in both a consulting and accounting position. Purchasing a Franchise requires time and due diligence. The most recent Franchise agreement I read was 132 pages. I have no legal experience or training, and always recommend a good lawyer. I review the Franchise agreements from financial, timing and other perspectives.
Hire the right people to assist you with your due diligence at the very beginning of your journey. You might not always like the answers but those answers can save you time, money and stress; now and in the future.
If you’ve had a terrible Franchise purchase experience I would like to hear your story. It could possibly help others before they are in too deep to get out. Just click the contact tab at the bottom of the screen if you are reading this post on the website. Or, you can leave your information in the form of a comment right here on the site.
Until next time,