Franchising 101

3 04, 2019

Getting Real About Resales

2019-04-03T15:48:20+00:00April 3rd, 2019|Tags: , , , , , |

Getting Real About Resales

by Diana Capirano
Certified Franchise Consultant

As a specialist in franchise resales, I’ll go on record saying that you’re as likely to find a flawless resale as hit a mega-lotto jackpot. But people continue to search for the diamond in the rough. “I’m looking for a business with a motivated seller, with low investment/high return, excellent cash flow (mid-six digits), and seller financing.” Sound familiar? Newsflash: EVERYONE is looking for the same thing. Lightheartedly I respond, “Wow! That sounds great. I’ll take 10!”

Many resales fall into the distressed category, something like buying a house with good bones but needing work and TLC. Premium resales may never even hit the open market because they sell internally (within the franchise system) or to personal/professional referral networks. Most great resales that hit the web portals come and go very quickly.

Some business seekers who concentrate only on existing entities can search web portals as a full-time job for years, logging countless hours, only to get beat out and then feel beat up. I’m not saying this to discourage you from looking for resales, but to caution you to be realistic and consider using a reputable resale consultant who can inventively search for them and then help navigate and vet the opportunities (Part 2 of this article in next month’s issue).

Three Major Considerations

  1. Investment level: First, determine a comfortable investment level, the necessary profitability, and a desirable industry. Please understand that you will probably not get high cash flow from a low investment. Also, be aware that businesses with great value potential could fail to qualify for Small Business Administration (SBA) or other traditional loans, so have a backup plan for financing if you can’t pay cash. Additional sources of income, such as a spouse’s paycheck, rental property, etc., may help you qualify for a loan.
  2. Owner benefit: If you’re looking to replace income immediately, what’s the target amount? Remember that you’ll have to fund the sale and need more time and capital injection so this “benefit” number will change.
  3. Desired industry: What are the requirements of the business model? Can you be an owner-operator if the franchisor mandates it? And don’t discount the fact that you should like what you’ll be doing. If it’s just a passive investment, you still need to get connected with growing the business.

Resale vs. Start-Up

A resale may be a good fit if you:

  • Like to improve things and consider yourself a fixer who thrives on challenges.
  • Are adept at problem-solving and at adapting when the unexpected happens.
  • Don’t make a practice of blaming others.
  • Want to buy low and sell high, assuming you’re putting in the sweat equity to grow it.
  • Don’t mind—in some cases—overpaying for the foundation, good will, your opportunity value, or the extra work needed to right the ship.
  • Have the financial bandwidth for an additional cash injection (operating capital) and don’t need to finance with a traditional loan such as one from the SBA.
  • Have the time and wherewithal to complete granular due diligence and go the long haul.

A start-up may be better if you:

  • Don’t want to inherit others’ problems or put in the time required to right the ship.
  • Enjoy developing things from scratch.
  • Need to fund with a loan.
  • Feel there is better opportunity in an open franchise area.
  • Have other sources of income or enough for living expenses while you ramp up.
  • Are not prepared to do a deep dive into due diligence before investing.

Both resale and start-up franchises require you to undertake thorough due diligence, investment of time and financial capital, and full-on commitment. Following the franchise training and systems will be necessary in both cases, but may be even more important in a resale because the previous owner might have strayed from the proven process.

Diana CapiranoDiana Capirano, CFC, has an expansive career that includes corporate and franchise sales and development, marketing and operations, mergers and acquisitions, structuring and negotiations, and business ownership. As a highly respected consultant and mentor, Diana espouses a profound commitment to help prospective business owners and investors understand and navigate the process of deciding on a franchise business. Contact Diana at 941- 999-0095, email diana@focusfranchise.com, or visit www.focusfranchise.com.

1 12, 2018

Two-Way Streets

2019-03-12T10:51:55+00:00December 1st, 2018|Tags: , , , , , |

Young Professionals

Two-Way Streets

Franchisors want to know that potential franchisees are a good fit

By Paul Segreto

Recently, a group of people inquired about a franchise opportunity with a fast-growing, emerging brand my firm had been representing for the past year. The candidates were financially qualified for several locations. We had multiple calls, including an FDD review, and on every call the group’s focus was on location and getting started ASAP.

Despite their aggressive nature, we kept them on course and guided them through the process. During Discovery Day, they met the brand’s founders for the first time. Here’s where things went south. The five candidates kept themselves busy talking to each other. They spent their time scribbling notes, running numbers, talking about location, all amongst themselves. They made no effort to speak with the founders, ask them questions, or interact at all. They merely told the founders how they should change this or revise that—and how they’d like to do so when they opened their business.

Seeing how quickly this meeting was going off course, we tried to create interaction between the parties. The founders worked hard to engage with the candidates, asking questions, trying to determine if there was a fit. When a founder asked the group, “Why this brand? What do you like about it?” The response was cool: “We know we can make money and when we do, we’ll commit to other locations.”

A day later, the group had signed a letter of intent on a location, procured a cashier’s check for the franchise fee, and they were ready to sign the franchise agreement that very day. The franchisors, however, weren’t interested. They didn’t believe these individuals would follow the processes and procedures the founders had meticulously developed and invested in for more than eight years. The founders knew their system was working quite well, as evidenced by high customer satisfaction and great unit economics including excellent profit margins. Long story short: They rejected the candidates.

This scenario isn’t uncommon—in fact, it’s unfolding more and more as franchisors are focusing on finding the right candidates for their franchises. Processes have evolved from applications and financial qualifications to evaluations of whether candidates are right for the franchise system and with where the system is today. Want to own a franchise? Start by working on your relationship with the franchisor.

COMMUNICATION IS KEY

A statement frequently heard is the franchise relationship is interdependent—the franchisor and the franchisee are dependent upon each other. Your success is our success, and our success is your success. Franchisors are emphasizing strong foundational components of relationships built on open, two-way communication, as opposed to the old cliché, “You’re in business for yourself, but not by yourself.” Many believe the franchise relationship is like a marriage, complete with a courtship before the I do’s.

Candidates are known to push through the process entirely focused on whether the opportunities are right for them. They give little to no thought about the franchisor’s perspective. Many believe the franchisees are the only ones making big commitments in ‘buying’ the franchise. They think the franchisor should be grateful, never giving thought to what that franchisor brings to the table.

Franchisors want to know that their franchisees are good fits for the brand—and for them, too. That’s where my group of candidates went wrong. The founders passed on their application because they believed the values they worked so hard to build throughout the brand—the ones their franchisees instilled every day—would ultimately be missing under this group’s management.

Had they tried to demonstrate that they were team players and interested in a relationship that worked both ways, the outcome could have been different. Learn from their mistake: A little genuine interest in the franchisors—along with the brand—could be the most important step toward sealing the deal.

Paul Segreto is a recognized entrepreneur, franchise and small business professional. His expertise includes startups and turnarounds, strategic planning, business and franchise development, branding, social media and digital marketing with primary focus on restaurants and service-driven businesses.

Segreto founded Franchise Today podcast in 2009 and Franchising & You podcast in 2018. He is CEO of the Franchise Foundry. Contact Segreto at Contact Segreto at paul@franchisefoundry.com.

31 10, 2018

Emerging Brands versus Legacy Brands

2019-03-11T15:18:24+00:00October 31st, 2018|Tags: , , , , , , , , |

Female Business Owner

Emerging Brands versus Legacy Brands

What you need to know

By Paul Segreto

As franchising continues to strengthen, new concepts are entering the market in a variety of industries. If you’re looking to buy into a franchise business, you now have more options than ever before. Along with exploring opportunities in legacy brands—those household names like McDonald’s, The UPS Store, and Gold’s Gym—you can also consider emerging brands, which are relatively new like Sub Zero Nitrogen Ice Cream, The Toasted Yolk Café, and Hummus & Pita Co. But why would you want to get involved with an emerging brand? After all, isn’t it safer to invest in a recognized brand with a proven system as opposed to investing in something new and relatively unknown?

Legacy Brands
Typically, a legacy brand has been developed over many years—in some cases, 20 to 50 years or more. There’s a relative level of success as exemplified by the shear number of locations across a region or the country. The perception of success is even greater. And you’ll pay for that success—buying into a legacy brand tends to cost more than an emerging brand. But the brand name is well known from a multitude of geographic locations and a huge amount of advertising. Some legacy brands are equated to slogans or spokespersons—think KFC’s Colonel Sanders. For training and support, you’ll most likely find an impressive corporate office with various departments and possibly local field offices or training centers.

Obviously, this type of business is well established and offers lots of support from corporate. It may be best suited for a franchisee who has a lot of upfront capital and who wants to follow systems—not develop them—that are already in place. An entrepreneur who can afford to make a big investment can make huge rewards.

Emerging Brands
An emerging brand is one where the initial business, from which the franchise has been developed, is well known locally. The founder is also well known and may be a local hero, of sorts. Customers live in the founder’s neighborhood with some knowing him or her from way back when. The brand is viewed as the antithesis of a big-chain establishment, attracting customers like magnets.

An emerging brand lets you get in on the ground floor of something—there is the possibility of a big payoff, but there is also huge risk. This brand is in its infancy; it is not well known and its mass market appeal may still remain a mystery. For an entrepreneur who wants to help shape a brand and who is willing to take on more risk for more potential reward, an emerging brand might be for you.

Paul Segreto is a recognized entrepreneur, franchise and small business professional. His expertise includes startups and turnarounds, strategic planning, business and franchise development, branding, social media and digital marketing with primary focus on restaurants and service-driven businesses.

Segreto founded Franchise Today podcast in 2009 and Franchising & You podcast in 2018. He is CEO of the Franchise Foundry. Contact Segreto at Contact Segreto at paul@franchisefoundry.com.

21 08, 2018

Exploring Franchise Opportunities

2019-03-11T15:15:37+00:00August 21st, 2018|Tags: , , , |

Business meeting

Exploring Franchise Opportunities:

Get the Answers YOU Need!

By Paul Segreto

Potential franchise buyers know before making a final decision, they need to obtain information from other franchisees and also, their possible franchisors. But what information do they need to get?

Generally, I recommend using the Franchise Disclosure Document (FDD) as a guide. Read through it and ask a potential franchisor very specific questions about each item listed. It’s a can’t-miss road map. Here’s a start.

What is the history of the franchise concept?
What is the founder’s vision? Who is on the executive and support teams? What experience do they bring to the table? If a franchisor hasn’t worked at a location, how has he learned about daily operations? Has he owned a business before? It’s important to understand how these individuals relate to franchisees.

How high could expenses go?
All expenses should be clearly defined. It’s imperative to gain a complete understanding of the range of expenses—and why they are what they are. Inquire about assistance for everything from advertising to site selection to your grand opening.
What is the temperament of the franchise group nationally and within your market? Of course, I recommend speaking with franchisees, too. Make sure to ask them about costs, problems, profits, and trends. Discuss competition with both the franchisor and franchisees.

Ask about exit strategies.
At some point, you may want to exit the system or you may have to exit. If you have to exit, is there support if you’re in trouble? Ask about transfer fees and the process of selling your business. Understand the franchisor’s approval process. What happened to each franchisee listed under terminated or closed franchises on the FDD? What happened to their locations? Have they continued operation under a new franchisee or corporate? Is the location still available?

Ask yourself if you would consider a long-term relationship with this brand and its leadership.

After this process is complete and you’ve reviewed your notes, trust your gut instinct! Take your time and think things through until you’re 100 percent sure of your decision. Make sure you have all your support mechanisms in place, including friends and family. Do not kid yourself. Do not lie to yourself. And, do not justify any negatives. Being honest with yourself will help you make the right decision.

Paul Segreto is a recognized entrepreneur, franchise and small business professional. His expertise includes startups and turnarounds, strategic planning, business and franchise development, branding, social media and digital marketing with primary focus on restaurants and service-driven businesses.

Segreto founded Franchise Today podcast in 2009 and Franchising & You podcast in 2018. He is CEO of the Franchise Foundry. Contact Segreto at paul@franchisefoundry.com.