Franchises: Why You Can’t Have It Your Way

In spite of my last few posts, I still get labeled as not liking franchise businesses. Well, that’s not true. I just dislike businesses (as far as selling them goes) which are not good businesses – franchise or not. In fact, I currently have a franchise business listed for sale. I was very comfortable listing it because the franchisee is making a very good net profit for a fairly relaxed 40 hours a week, Monday to Friday. The franchisor seems very supportive and they have “stringent” operating procedures and a training regime.

One of the challenges I have in selling this business, as with any franchise business, is finding the right kind of person to buy it. Franchises are not for everyone. They are certainly not for anyone who is creative or entrepreneurial. You have to operate a franchise within very strict operating procedures. That’s what a franchise is. A tried and tested set of procedures based around a good product or service which can be replicated over and over again.

A couple of quotes about franchise businesses which I believe sum it up. “With intelligent systems you don’t need intelligent employees.” I have heard that associated with Ray Kroc of McDonalds fame. Not sure about that. The other quote, no idea of the original source, is that the ideal franchisee is a retired airline pilot. Why? Because airline pilots are trained and conditioned to follow procedures – not matter what!

At the end of the day, provided that the product and systems are tried, tested and proven to deliver something useful to the market – then the success lies with choosing the right person to be a franchisee.

For more on this, I recommend you read the latest article from Dr John Hayes (How To Buy A Franchise blog) which is titled

Why You Can’t Have It ‘Your Way’ When You Buy A Franchise. Get This: It’s Not A Democracy!

Just click the title above to read Dr John’s words of wisdom.

P.S. If you are in Perth Western Australia consider registering for my latest half day workshop on “The 7 Key Steps To Developing Your Business Ready For Sale” – just go to the navigation bar at the top of this page and click on “Workshops”.

I’m not really against franchising – it just seems that way!

From previous posts you may get the impression I am against franchising – I’m not.

Buying a franchise can be a great stepping stone from being an employee to becoming an independent business owner. The upsides of buying a franchise (provided it is a good franchise) should be;

you get a ‘turn key business’ with systems and processes already done for you

you get a quality product or service ‘done for you’

you get training in all aspects of the business, sales & marketing, service and product or service

the franchise should have a track record of success ( check it out first)

in Australia the very strict Code Of Conduct for franchisors protects franchisees

you have a ready made recognisable brand

the franchisor should be doing marketing and lead generation for you

it “should be” a relatively low risk investment

There are other positives too, but you need to do your homework BEFORE committing to the purchase.

Whenever I am asked for advice on buying a franchise business I always say “Find out how you are going to get out of it.”

Why would I say that? Because I see so many people ‘trapped’ in a franchise which is very difficult to sell and unable to be sold at a price that will recover the initial costs of the franchise. As a business broker I get approached by many franchisees who want out and want to sell and when I appraise the business they are horrified at how little it is really worth. A situation often made worse by franchisors who have totally unrealistic ideas on what their franchises are worth when being sold on.

There I go again – being negative!

Seriously, the original concept of a franchise was that it was simply a license to operate a business for a predetermined period of time.

You don’t actually own a business. You have to make your money while operating the business – not when you sell it. As an independent business owner, you can do both. Make good money while operating the business AND when you sell it.

Remember, if buying a franchise – virgin or pre-owned – find out how you can get out of it and talk to people who have been there and done that. There are good and bad franchises just as there are good and bad business in any industry.

That’s it for this post – let me have your comments, questions etc.

P.S. I was a franchisee for 9 1/2 years and sold at a good price! It can be done.

There’s No Accounting For Taste

After my little dummy spit on franchises, I had a client yesterday ask me if I had a fast food franchise for sale as his wife is looking to buy one. Not only that, he mentioned a particular franchise by name. As it happens, I know one of my colleagues has one listed so we may be able to help. And that’s all fine!

However, after getting more information, I suggested his wife look at another business we have listed which would suit her background very well and in my opinion would be a much better match. They are
comparable in price so let’s compare;

Fast Food Franchise
7 days a week
Long hours
Low staff loyalty
Low gross profit
Rely on passing trade
Royalties payable

Alternative Business
5 days a week and flexible
Low flexible hours
High staff loyalty
High gross profit
Loyal niche client base
No royalties

And there’s more ……….

And so it goes on. But the client is still leaning towards the fast food franchise. Why? Because it is perceived as being ’safe’ and the brand is well known. It comes back to that old sales maxim – sell the client what they want NOT what they need! Either business is a good buy – otherwise we would not have listed and marketed them both. And buyers have THEIR reasons for buying which may not be the same as our own.

Just goes to prove, there’s no accounting for taste!

Regards,

John

Sleepless In Perth – Franchises

I have been having a sleepless night! Why? Because I know that in the morning I have to deliver some disappointing news to a prospective client. You see, I’ve been asked to do an appraisal on a business ahead of selling that business for the owners.

So what’s the problem?

The problem is that the business is a franchise business in a shopping centre.

So why is that a problem?

Generally in these cases the owners have invested an enormous amount of money to buy the franchise and pay for the fit out of the premises. Often this can be as much as $450,000 or $500,000. Just to get started in the business! Then, every month they are paying royalty fees to the franchisor of typically 7% to 9% and possibly a marketing fee on top of that. Then there are the very high lease costs for the premises to be in a ‘quality’ shopping centre where there are no options to renew on the lease and very little room for negotiation. Then of course the business needs stock as well. Depending upon the type of business the stock value can be anything up to $250,000 and more. I have seen these levels of stock in such businesses.

So the owners work long hours – often 7 days a week – to scrape together meagre profit of $80,000 to $100,000 per year. Great looking business but a long time to get the investment back. In some cases you are looking at 5 to 7 years just to get your investment back.

So after 4 or 5 years the owners are tired and working long hours and decide to call it a day and cash in their business – sell! They go to their accountant who, in most cases, sets an unrealistically high figure on what the business is worth. You see, the accountant looks at what was put in to the business and says, OK, you have a written down value of $250,000 on the fit out of the premises, plus $20,000 plant and equipment, plus $200,000 of stock and you make $100,000 per year net profit. That makes your business worth – $250,000 plus $20,000 plus $200,000 plus $100,000. A total of $570,000.

Wrong! When selling a business as a ‘going concern’ the normal valuation method, in the vast majority of cases, is based upon the maintainable net profit after add-backs and adjustments multiplied by an ROI factor. (For detailed explanation of this visit http://www.businessreadyforsale.com/ArticleKey2.html).

So in the case of my current prospective client they have a maintainable net profit in the region of $80,000 and the business type will attract at VERY BEST a maximum of 40% ROI. That is a multiplier of 2 1/2 times. In other words $200,000 tops! And that is inclusive of stock and plant and equipment and everything else. Not a lot of reward for 5 years of effort. And on top of all of that, the franchisor wants the new owner to upgrade the fit-out (cost of $25,000) and there is only two years left on the lease with no guarantees of a renewal. Would YOU buy that business?

So you see why I am sleepless in Perth. By the way, this is a very typical scenario for a retail franchise business in a shopping centre! Remember, franchising is having a license to operate a business – not necessarily owning a business.