Evaluate a Franchise as if You’re Planning to Sell in Five Years
As people like to say “Nothing Lasts Forever” and when it comes to owning a franchise this statement is obvious. When an individual invests in a franchise, most people plan on selling the franchise at some date in the future or operate it until their children take it over. For those individuals evaluating a franchise investment, I suggest a somewhat unique approach. This is to plan on selling the franchise within five years. By incorporating this approach as part of your analysis, it will force you to take a much more disciplined and thorough approach when evaluating the franchise.
Although this approach may not represent your actual objective, it will alter the way you evaluate and consider a franchise opportunity. This approach will establish a timeline and process, which will cause you to emphasize certain aspects of the franchise. Private equity funds and venture capital firms take a cautious look into potential businesses
they might invest in. The reason is because they want a return for their investors in a period of 3 to 5 years. This benchmark requires them to evaluate an investment opportunity with a critical eye. You can use this same approach, although you may not have the benefit of an MBA to perform the analysis.
In addition to the questions and items that should be a part of any franchise evaluation process the five years selling approach will place more emphasis on the following areas:
- Does the franchise provide an in-depth Item 19 Financial Performance Representation? If no it’s going to be difficult to construct an accurate Pro Forma income statement and cash flow projection. My advice is to walk away.
- Try to gain franchisee feedback to determine how quickly did their the franchise reach breakeven and profitability? Although some franchisees may be reluctant to provide a complete answer persevere even if it means contact more franchisees. This critical component of a franchise evaluation becomes even more important.
- Is the franchisor stable with a consistent track record of growth? Has the franchise experienced any variability in its growth and performance?
- What is the state of franchise relations and amount of litigation?
- Does the franchise brand have strong market recognition? Is the franchise well positioned in specific markets or dispersed among numerous markets? Strong franchise concepts like Panera Bread require a minimum of three franchise locations in a market.
- Does franchise leadership possess sustainable visionary skills and leadership? As a franchise system grows franchisor leadership must be capable of administering this growth.
- Does the franchisor have a strong balance sheet and a record of consistent income? Compare the amount of franchisor revenue earned from initial franchise fees versus continuing royalties. An imbalance, that favors initial fees can indicate that the franchisor is more focused on selling new franchises rather than building a successful and viable franchise network.
When evaluating a franchise opportunity set a goal to sell it in five years, even though this may not be your true objective. By establishing this as your goal, it will require you to evaluate a franchise opportunity in a more disciplined way. Although your evaluation process may become significantly more detailed, the results can increase your probability of success and lower the risk of failure.
To learn more about franchise opportunities, visit BeTheBoss.com.
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