HOUSTON BUSINESS REVIEW

Tutorial On Selling Your Business: Buying a Franchise – Part 1
By Ralph Fain

Ralph Fain is a principal in the R/ Fain Group, a professional business brokerage firm which confidentially represents the interests of sellers/ buyers of “Mainstreet to Mid Market” companies (revenues from $1MM to $25MM). Mr. Fain has over 20 years of broad business experience with Fortune 500 companies as well as with small/medium sized companies and has served in various capacities including Controller, Vice President, and President/CEO. Each week he will provide comprehensive information on the many aspects of buying/selling businesses.

Last week’s article summarily discussed the three options a person has when considering going into business for himself/herself – starting a business from ground zero, purchasing a franchise, or buying an existing business. Today’s article covers purchasing a franchise in more detail – franchises in general, what you get, the advantages and disadvantages, etc.

Buying a franchise can be an excellent choice from someone who wants to be in business for himself but who wants to minimize (as much as is practically possible) the risk associated with running a business; this concept also appeals to anyone who is not certain as to the type of business/industry one wants to work in and is suitable for those without a specific profession or trade to capitalize on. In most franchise arrangements, risk is minimized somewhat as you are utilizing a proven business concept and your business has instant name recognition and “history”.

Franchising can take many different forms – agency, distributorship/dealership, licensing, etc – but we will restrict our discussion to the most common type. In this form, a franchisor grants a license/right to another (franchisee) to utilize the business concept/product/service of the franchisor – generally in a specific location or area.

The franchisee operates the business under the name/trademark of the franchisor, sells the products or services of the franchisor, receives training and assistance from the franchisor and, in some cases, receives financing/financial support from the franchisor. The franchisee owns the operation he/she works but the franchisee must adhere to the franchisor’s rules of operation and the rules related to how products/services are marketed and sold.

The franchisor charges a franchise fee (initial fee paid by the franchisee for the franchise rights) and charges the franchisee an ongoing royalty fee (as a percentage of sales). The franchisor is there to provide training and assistance to the franchisee – including, in many cases, helping the franchisee select the most favorable location for his/her business. The franchisor may also provide marketing assistance/training to the franchisee and will encourage the new franchisee to visit other successful franchisee operations in order to provide as much “success insurance” as can be reasonably expected. Please note that training and assistance vary significantly from one franchisor to the next (but all legitimate franchisors have a vested interest in making the franchisee as successful as possible) – so, with all else being equal, choose the franchisor with the most comprehensive training and marketing programs.

The extent to which we can review this topic is somewhat limited in that our articles are generally restricted to one page for brevity’s sake. Consequently, in order to cover this subject as thoroughly as possible, we will review franchises in a series of articles; today’s article is the first of what should be a 4-5 article series. The series will review franchisor/franchisee assessments, franchise costs, advantages/disadvantages, selection criteria/process, franchise agreements, etc.

Please note that although we will be delving into much detail in these articles, it is still incumbent upon you, the purchaser, to employ and utilize professional counsel – CPAs, attorneys, M&A/business broker advisors, etc. The reader of these articles can not possibly glean sufficient information from this series of articles to “go it alone”. Your professional advisors will guide you through the process of purchasing a franchise and are worth every penny paid to them – do not be “penny wise and pound foolish” by foregoing the employ of professional advisors (they will definitely save you money in the long run).

See you next week in this space when we will present Part 2 of Buying a Franchise. Should you have any questions or require additional information, please feel free to contact the R/ Fain Group @ 832-646-0832 or via our web site.