3 minutes reading time (691 words)

How to get the best deal when buying a franchise

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The old saying with houses is that you make your money when you buy. The principle being, what you pay will influence your return when you sell. Pay too much on the way in and it will be difficult to obtain a gain on the way out.

Similar dynamics apply to buying a business. What you buy and for how much will definitely influence the future sale price and the return on investment when sold.

However, when buying a business there is much more to consider than just the price and location.

And with a franchised business, there are additional factors that will influence the future return on investment.

These factors create opportunities.What are the secrets and tricks and tips that nobody tells you?

Understand the market
Instead of questioning if there is a current market for the business – ask will there be one in the future?

To reference the all-time classic example: back in the day Blockbuster Video franchises were hot.

They made a lot of money and accordingly the entry and resale prices were significant.

Technology played its hand here, significantly changing the market and the value of the individual and overall franchise businesses.

We also need to consider other socioeconomic trends and where we are in the economic cycle and how it relates to the business.

There are always winners and losers at each stage of the cycle. Understanding the cycles and trends may help you pick what's trending up, or down and spot an opportunity.

Brand
A brand's position or its perception will influence sale and purchase pricing. What opportunities does this create?

The logic is that a category or brand leader may present the best opportunity to obtain a return on your investment through higher sales and market position.

You are likely to pay for this in goodwill if buying an existing business and potentially through a higher initial franchise fee than if it was a greenfield business.

However, challenger brands may represent a good opportunity for a higher return on investment.

A well-resourced and aggressive challenger has room in the market to grow and carry your business, and its value with it.

Look further than the Profit and Loss statement
Essentially, existing businesses are valued by a multiple of their earnings or profit.

I would suggest that to maximise your return on the investment opportunity when buying a franchised business, you need to look beyond the profit and loss statements.

In addition to the market and brand issues above, look at the sales trend line over the life of the business.

Have profitability changes been driven by management of the business or sales? Look at the performance of the business against the franchises' benchmarking information – are there opportunities to improve performance and ramp up the return?

Another property analogy: the best house in the worst street fixer upper approach also applies.

Look for underperforming franchises in good brands. Is it user error or market location? If the former, this may present potential to purchase an underperforming asset, and with it perhaps the largest opportunity make to money.

Negotiate the best deal
Finally, you need to understand what you can, and what you should not, try to negotiate with the franchisor.

There is a tendency for people to critically look at the franchise fees and attempt to negotiate these as a way of saving money.

The franchisor needs fees to run, develop and market the system. Assuming the business stacks up overall, they are a cost of doing business.

However, you may be able to negotiate your entry and exit costs, renewals and transfer obligations.

There is also significant potential in being able to negotiate territory expansion rights. Equally, be aware of refurbishment and re-development costs.

These are essential to ensuring brands remain fresh and current, so are required at some stage.

Again – as in selling a house – evaluate your potential return on investment and whether you will be reselling a fixer upper, or a fully renovated operation.


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