Tips on Investing in a Franchise




In his article at Bbpinc.com, Ed Teixeira equates an investor as someone who is not involved in the day-to-day operations of a business.  Such arrangement is apt for a franchise where, aside from the efforts of the franchisee, the success of the business relies on the support and operations system developed by the franchisor.  As an investor, a franchise candidate should study the value of his or her investment and the return on investment.  Focus on the financial aspects of the transaction.  Ask other franchisees about the business and obtain financial information.  Do not succumb to the sales pitch - seek additional information on the franchise yourself.  Is the franchise a good business opportunity?

If an individual tells a franchisor representative that they would like to invest in a franchise, you can expect the franchisor representative to equate investor with someone who will not be involved in the day to day operation of the franchise. I realize this can be considered splitting hairs but in reality the difference between an on-going business and a franchise is the fact that the on-going business has revenues and is up and running. The major distinction between the two entities is that an independent business is dependent upon the owner, while a successful franchise requires the support and actions of the franchisor in addition to the efforts of the franchisee. This is a major reason why when considering a franchise opportunity the candidate should play the role of investor versus the role of franchise buyer.

To be in the franchise investor role follow these tips:

  • Determine the return on your investment. Go through the franchise process with the objective of identifying the anticipated return on the investment you’ll make. Being your own boss and having a degree of personal independence are some of the benefits of operating a franchise, but you need to earn a fair return on your investment. Unless you have the right business credentials you should engage professional advisors such as an accountant to help you analyze your investment.
  • Act like an investor not as a buyer. When investing, most people focus on the financial aspects of the transaction and less on emotional elements.
  • Establish a value on the franchise investment. Do a break even and return on investment analysis. Be skeptical of mature franchisors that fail to make an Item 19 disclosure of franchisee revenues or earnings.
  • Obtain as much financial information as possible from current and former franchisees.
  • Use a franchise attorney and accountant to review the Franchise Disclosure Document. The franchisor financials can reveal a great deal about the franchisor, but it takes a qualified person to spot problem areas and red flags.

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