Buying a Franchise – what they won’t tell you

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Buying a Franchise – what they won’t tell you

Isaac Singer whose name became synonymous with the sewing machine began one of the first franchises in the United States 160 years ago. By 2007 the Census Bureau was reporting that 10.5% of the businesses with employees were franchises. This model of entrepreneurship has become increasingly popular. One reason is that it offers “easy” access into the world of business ownership.

And it appears an attractive proposition at first. Franchisors put on lavish presentations. Nervous investors find the promise of training and franchise support to be a great comfort. But there is one thing that the Franchisor won’t tell you. In many cases the start up costs of these franchises are more the resale value.

Here are some examples that I have come across in my own career.

1.A sub sandwich franchise. Start up cost $150,000. Priced at $50,000 and did not sell.

2.Restaurant franchise. Start up cost of $1M. Sold for $650,000 with a large seller held note.

3.National Restaurant franchise. Start up cost $1.5M. Sold for $670,000.

4.Massage therapy franchise. Start up Cost $450,000. Sold for $392,000.

These examples are not unique. Opening a franchise can be expensive. Franchise fees are just the beginning. There are travel, training and accommodation costs. There follows buildout expenses, furniture, fixtures, equipment, marketing costs and inventory. Staff must be interviewed and hired. The time and effort put in by the owner is another cost not typically itemized. And on day one, when you open the door – after all this expense – you start with zero customers. It can often take 1-2 years before you break even. During this time you are pouring more of your precious reserves into the business.

Compare this to the advantage of purchasing a resale franchise. The groundwork has been done for you. You walk in to a business with location, staff, equipment, inventory and customers already in place. Furthermore the Franchise Transfer Fee is typically a fraction of the original fee and can often be negotiated with the seller. You still benefit from franchise training and support. In addition you can negotiate training and support from the current owner. Hopefully if you have selected well you are making a profit from day one.

So before you invest your hard earned money I recommend you take a look at the franchise resale market. Your local friendly Business Broker will be happy to help.

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