Sunday, May 29, 2011

Buying a franchise in retirement? Ask lots of questions!!

"Price is what you pay. Value is what you get." - Warren Buffet, investor, (1930 -   ) 

By Julia Anderson
With 10,000 baby boomers turning 65 every day, many of us are looking for a new business investment opportunity or a semi-retirement.

We all dream of starting our own business, being our own boss. For those of us 60 & Single, a small business may offer some sort of part-time income in retirement and something to hand-off to our kids.

Buying into a franchise is a tempting option for retires. But before you write that big check out of your life savings, make sure you understand all aspects of the deal. It is easy to get burned.

First the pluses. Franchising in America during the past 60 years has allowed many good ideas to grow into big businesses while generating handsome returns for the entrepreneur as well as his or her franchise partners along the way. The franchisee can put as much time and effort into the project as they wish, work with a corporate partner and have the opportunity to be successful and grow within the franchise chain.
Something like one in 10 Americans works for a franchise-chain operation.

The formula is simple: Franchisers have the great idea or concept but can’t afford to build the business entirely on their own. Instead they offer the idea to franchisees, provide the training, marketing and ongoing support to open their own stores or other business operation. In turn, the franchisee invests his/her own money to buy into the franchise corporation and promises to set up the business and operate it within the framework of the franchise rules. McDonald’s fast-food chain is a prime example of a great idea that allowed everyone involved to make a lot of money.

But for every good franchise opportunity there are plenty of bad ones. There also are people pitching franchise scams intended to take your money upfront and give you little reward in return. There's been a recent spat of janitorial service scams, for instance. In general, home-based business franchises come up short.

Kevin B. Murphy, a San Francisco-based attorney and expert on franchising, operates a Web site called There Murphy recommends that any one looking at a franchise business opportunity consider these general issues:

- Industry Trends. Is the franchise in a cutting-edge industry that is doing well currently and is projected to do well in the future despite any economic slowdown, asks Murphy. Education, health care and home-improvement services are stable categories. Food is over-saturated generally and, except in exceptional circumstances, is not worth the high investment, long hours, headaches and marginal income, he said.

- Total Initial Franchise Investment: In general, don't expect a franchise that requires a five-figure initial franchise investment to produce a six-figure income. As with most things in life, you get what you pay for. On the other hand, don’t assume a six-figure investment will lead to a six-figure income level. Be realistic and conservative.

- Real Business. Is this a legitimate retail business, as opposed to a "work out of your home" operation? The vast majority of work out of your home concepts produce marginal income at best.

- Franchise Management Expertise. Does the management team of the franchiser (the company selling you the franchise) have executives with demonstrated past achievement and experience in operating a franchise company (not just persons who have sold franchises)? If not, this is a big red flag. In other words, can you trust this franchiser to make sure franchisees are successful? (Make sure you read, Josh Kosman's book, "The Buyout of America," about how private equity firms are raiding America's franchise industry, ruining businesses and shafting franchise store owners.)

The federal Small Business Administration offers plenty of franchise-buying information at its Web site. Right out of the gate, the experts at the SBA suggest that you ask yourself these two questions: How much can you realistically afford to invest and and how much can you afford to lose? Next, have you ever owned or managed a business?

Whether franchise or not, starting up a business is a long process requiring constant tweaking and plenty of hard work. At some point, you may realize that you’re paying all your bills….employees, rent, loans, taxes and insurance…but you can’t afford to pay yourself.

That’s where goals come in. How long can you give the business before you have to make an income? Do you need a certain income?

Get a written substantiation of any income projections, or income or profit claims from your franchiser,” the SBA says. “This is required by the Federal Trade Commission (FTC) when a franchiser tells you can earn from investing in their franchise. If they do not have one or refuse to provide you with this information, they may have made a false claim.”

Also think twice about buying into an existing franchise business in a corporation that has been recently purchased by a private equity group and no longer is operated by the original franchise founder.

Equity groups are there to squeeze more profits out of the operation, not to particularly take care of franchisees. Without mutual trust, say experts, the business may begin to rot from the inside.
According to the SBA, a quality franchise provides help in several key areas including product development and services, store sitings, market area guarantees and a quality corporate management team.

More tips on investing in a franchise from
No. 1 - Look at several franchise options that fit your interests and your passions. Avoid in-home businesses...they rarely generate enough income to make them worthwhile.

No. 2 - Get advice. Other than the firm offering the franchise get independent advice from your banker, attorney and an accountant. Talk to franchise owners already in the business. Ask about the relationship with the it one of trust? Are franchisees getting the training and support they need to be successful? Visit with owners in an entirely different locations so they don't view you as competition.

Get the list of recent store closures. Call a couple of ex-owners who closed or sold their stores and find out why...what went wrong....why they exit?

No. 3 - Think long and hard about whether you have the necessary skills to make the franchise a success. Do you like accounting/bookkeeping? Will the franchise operator train you? The "fit" is critical.

No. 4 Look into the franchiser's finances. How long have they been in business? Do they have healthy accounts? Have they sued any franchise operators? If so, how many? Carefully read the franchise agreement.

No. 5. Check out local market conditions. Is there going to a lot of competition for your business? Will there be enough people in the local area to make running your business viable? Understand the extent of your restricted or exclusive franchise territory and verify that it makes sense to you and your advisers.

These tips just touch the surface of the work you need to do before investing in a franchise. Don't be in a hurry. To improve your probability of success, say experts, you must take the time to evaluate yourself, your strengths and weaknesses, and, most importantly, the franchiser and the industry in which it operates.

Disclosure statement
At some point in the negotiations your franchiser should provide you with a franchise disclosure document. This is usually a 50-plus page book, says Jim Deitz at  that gives you a clear idea of what the relationship will be like: Length of the agreement, territory, responsibilities, opportunities, costs. Read carefully through the financial history of the corporation.

Will they be in business for the long-term?

Before you put your cash and your long-term future on the line take time to understand the risks and rewards of a franchise business.

For more:
Buying a Franchise, click here
Small Business Administration, click here.
"The Buyout of America," by Josh Kosman.

1 comment:

  1. Thank you for all the information very nice article thank :)