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How to Buy a Franchise: Three Common Problems Explained

October 26th, 2009

buying-franchise.jpgWhen looking at how to buy a franchise business, the problems facing most beginners stem from a lack of understanding about the relationship between franchisor and franchisee. Buying a franchise is like buying a stream of income. A good rule of thumb is that the more reliable the stream of income, the more the franchise will cost, and the less control you’ll have over your own business. Franchisors generally make their money by selling franchises, selling goods and services to those businesses, and receiving a percentage of revenues. The better franchises are those that make the lion’s share of their profits through the franchisee’s ongoing operations. That gives them a strong motivation to help you succeed. The better you do, the better they will do. Below are three common problems that you may have when buying a franchise:

1. The franchisor rejected my application.

Don’t dwell on anger and disappointment. Instead, focus on what you can do to turn the ‘no’ response around. One reason for your rejection could have been your failure to become an expert on the financial needs and wants of the franchisor. Go back and check your research and fill in any gaps you uncover.

Another reason for your rejection could have been your failure to get the franchisor to trust in your skills and abilities to run the business, or your capability to learn how to run the business. However, since franchisors make money selling franchises, and most offer training programs, odds are that if there’s a lack of trust it’s in your ability to raise the money, not manage the business.

The first step is to look behind the rejection and discover the reasons for it. In this instance it’s likely the franchisor will readily provide you with the reason, since they’re as eager to turn things around as you are. Once you learn of the reason, search out new facts that will either refute it or make it moot. Perhaps you have a greater net worth than you showed on the application, since you failed to include the summer home your wife owns. Maybe you forgot to include that regular end-of-year bonus you receive from your employer, or to make note of some realistic financial expectations. Or you could have forgotten to clean up that mistake on your credit report resulting from a disputed credit card charge. Whatever the reason, provide some new facts and you’re very likely to turn this rejection into an acceptance.

2. Will the franchisor do everything they said?

Your actual problem is that you haven’t done a sufficient job of becoming an expert on the franchisor’s track record, financial health, and reputation. This problem is framed too subjectively. Don’t accept general and ambiguous statements of reliability from the list of approved contacts provided by the franchisor. Instead, ask specific, factual questions. Did the franchisor provide the advertising campaign promised last year? Do deliveries arrive on time? How frequently are management refresher classes offered?

Clearly, the secret here is to become an expert on the experiences of other franchisees. Seek out all the ones you can locate in your region. Ask them specific questions about the promises made by the franchisor. Dig for potential problems. What would the franchisees change about the franchisor? Would they buy this franchise again?

Express your thanks to other franchisees for their willingness to speak with you. Treat them as respected veterans of the business. Say that you admire their success and want to learn from their experience. Most businesspeople are happy to share their knowledge on how to buy a franchise, particularly with those who share their enthusiasm for the industry.

Presumably there are at least hundreds of franchisees out there for you to speak with, so there should be no need to turn an individual refusal to speak with you around. If there are so few existing franchisees that it’s essential you speak to each one, you’re buying the wrong franchise. Remember that you’re looking for a guaranteed stream of income, and that can only be documented by a substantial track record. In my opinion, it’s better to start your own business than to buy into a fledgling franchise.

3. I’m afraid that I’m going to end up working for them.

Your real problem is that you don’t understand the nature of franchising. If you buy a franchise you will indeed be working for the “mother” company. A franchisee is a major, not a general. He has some control, but it’s limited and subject to the orders of his superiors.

Set aside your feelings about the relationship between a franchisor and a franchisee. Instead, focus on the facts: the text of the franchise agreement. That document will spell out exactly what you will and won’t be able to control. If you can’t accept the constraints the agreement places on your independence, you shouldn’t buy the franchise.

You need to set aside your external research on franchising and this particular business, and instead conduct a thorough self-analysis. Do you really have the personality to be a franchisee? What do you really want from this business, or from any other business you run? Are you looking for an outlet for your creativity or are you looking for an income? Do you have trouble taking orders or conforming, or are you a good team player?

You should trust the franchisor to stick to the terms of the agreement. You can count on them exerting as much control over you as the document allows. The real issue of trust in this problem is whether or not you trust your own self-analysis. There’s too much time and money at stake here to delude yourself into thinking you’ll be a happy franchisee when your personality is really that of an innovator. If you don’t trust your own judgments bring in a team of problem mentors, individuals who’ve had both personal and professional experience with you, and ask their opinions.

This article on how to buy a franchise was sent to us by “Chenting”, a member of the DigitalPoint forums.

4 Responses to “How to Buy a Franchise: Three Common Problems Explained”

  1. comment number 1 by: loan offer spammer

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  2. comment number 2 by: Franchise-Santa-Barbara-Taylor

    Great insights you’ve shared. These are really helpful. The good thing about franchising is that it’s easier to start a business since the name has already been established. Now, it’s even made easier because you can start for under $50,000. This can also be purchased through in-house financing.

  3. comment number 3 by: Chris

    You should check the sites Thetdlgroupltd.com which is the company that owns Tim Hortons. This name is owned by people who are starting a campaign to tell the truth about what this company is all about and are gathering former franchisees to share their horrifying experiences of owning a Tim Hortons. Also Timhortonslies.wordpress.com is another site detailing the way this company operates.

  4. comment number 4 by: Franchise Expo

    @ Franchise Expo numerous categories for franchises are offered. We have resources and data to keep the consumer informed and satisfied. I trust this website for all of my questions regarding franchises, resources, data, advertising etc. Check out their website at FranchiseExpo.com

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