top 10 mistakes franchise buyers make

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  1. 1. Top Ten Mistakes Franchise Buyers Make Copyright 2014 Fran5
  2. 2. Robert Edwards beganhis career in corporate Sales workingfor companies such as Pitney Bowes developingand managing sales teams. After startinga small part time mail order company inthe 90s Robert left the corporate worldto pursue entrepreneurship full time. His varied business ventures included a Toronto based video store chain,a property development company,a webdesign firm anda Franchise Brokerage. Robert is currently a franchise broker and the Founder of the FRAN5 group. AUTHORS PAGE: Copyright 2014 Fran5 Forthe first 20 years of his career Joe Fedorchuk workedas a CharteredAccountant andSenior Project Management Professional forseveral large corporations. In2005 citingburnout Joe left the corporate worldandopenedtwo Subway restaurants whichhe successfully developedandeventually sold. Seeking to leverage his years of franchisingand business experience Joe became a Franchise Broker in 2013, and is now a Senior Partner withthe FRAN5 Group.
  3. 3. 1. Buying a Franchise Name, not an Operational Model 2. One Brand Fixation 3. Buying a Job 4. A $500,000 Ego 5. Inappropriate Financing 6. Assuming a Franchise is "less work" 7. Buying into industry Hype and Awards 8. Not understanding profit model and obligations 9. Glossing over the FDD 10. Lack of Capital TABLE OF CONTENTS: Copyright 2014 Fran5
  4. 4. the following pages outline common mistakes frequently made by aspiring franchise owners. This guide should be used for informational purposes only. Each franchise buying situation carries unique variables for which these suggestions may or may not be applicable, and to varying degrees. We hope you find this guide helpful. CHAPTER 1: The Dream Copyright 2014 Fran5
  5. 5. The vast majorityof franchise buyers choose a franchise simplybecause theywere attracted to it as a consumer. It hits them where their heart is . Good sandwiches,great haircut,a neat new franchise idea. A typical scenario goes somethinglike this: A husband and wife are drivingalongthe interstate and stop at a coffee shop that happensto be both quaintand busy. The statement This brand would do great in our town is followed by a call to the franchisor.Several brochures and hype and hoopla filled telephone calls later theydrop $300k and now havea store in their city. Hopefullyit works out. Unfortunatelyveryoften it doesnt. There is also the I love pets I would be great at owning pet franchise justificationthat often results in the owner dreadingrunningtheir business or even closingthe doors as theyhad no idea there was more to the business than shampooingFido's and felines. Theyhad to perform SALES? By exploringthe franchises core operational model you can trulyalign your skills,strengths and weaknesses with your new business.The actual product orservice becomes secondaryto the functions you are expected to perform and should be proficient at doing in order to build a big business. For example not manypeople wake up and sayI want to own a cleaningfranchiseas it conjures up visions of moppingand scrubbing.And franklycleaning is not perceived as a glamorous profession. But the truth is that the operational model ofmost cleaningfranchises is executiveoriented,meaning it is all about sales,marketing, hiringand managing,landingcontracts and closingdeals.The fact that cleaning happens to be the service offered is inconsequential.It could be painting,drivewaysealing, furniture repair or anythingelse with a similaroperational model. And as boringas cleaningand paintingmaybe they are historicallyverysolid moneymakers. One of the largest cleaningfranchises has over 25% of their owners grossing1.4 million a year with an investment not much over 100k. The largest paintingfranchise has average annual franchisee revenues of almost $750k. While initial attraction to a franchise maybe emotionallydrivenbe certain you also havea solid understandingof the operational requirements and dayto dayfunctions before you sign on the dotted line. Performingactivities you dislike or not adept at can result in eventual failure. Mistake #1 Buying Franchise Name not an Operational Model // Page 9 Top 10 Mistakes Franchise Buyers Make Copyright 2014 Fran5
  6. 6. When prospectivefranchisees engage with the franchisor theyare presentedwith informationthat is biased from the franchisors point ofview. This is not to insinuate a franchisor will outright mislead (although there are some less than ethical operators),however manywill focus on positives while glossingover negatives. Much the same as a parent perceives their own child as the brightest and best,a franchisor will also often harbora favorablybiased opinion. Surprisinglymanyprospective franchise buyers stoptheirresearch right where it should begin.They accept the franchisors multiple industryawards,historical earnings,and manyyears in business as proofpositivethat theywill also do well. And manypeople want to drinkthe Kool-Aid. Not a week goes by where we are asked to provide a second opinion regardinga specificfranchise and the prospectivebuyer becomes indignantwhen we offer up some potential negatives.People want the perfect dream of business ownership.When we jeopardize that mindset manyprefer close their mind rather than leavethe comfort of their delusion. This single mindedness becomes most prevalentwhen investors havementallycreated a perfect (yet erroneous)image of themselves operatingthe franchise: Sun shiningthrough gleamingwindows as smilingcustomers raveover yogurt smoothies and the cash register rings its unendingapproval. Its admittedlya nice dream but not a foundationto bet 300k on. The truth is that there is not a single franchise ofthe 3000+ that exist todaythat do not have negative attributes ofsome sort. High attrition,high failure rates,seasonality,poor management,nearingthe end of the industrygrowth curve, juniorbrand ,at the beginningofthe growth curve, high royalties, limited support,strongsales requirement, theyall havesome weaknesses alongside their strengths. But under the right ownership these weaknesses can be minimized or even become strengths IF the investor has not been oblivious to their existence. The key is to look at several brands.Unemotionallyexplore both strengths and weaknesses.Find the brand whose weaknesses will not be debilitatingto you and strengths are most appealing. Review them all with a critical mindset and once satisfied you havea clear picture then make an educated decision. Fixatingonlyon the positiveaspects of one brand is a terrible wayto make an investment. Yes, it is advisable andcommendable to harbor a positiveoutlookfor your future business,however too many investors allowthis perfect vision to propel them forward while puttingon blinders to potentialnegatives. Top 10 Mistakes Franchise Buyers Make Mistake #2 One Brand Fixation // Page 6 Copyright 2014 Fran5
  7. 7. As Brokers we are familiarwith the earnings levels of most available franchises.Someare very high, others very low. This information however,as crucial as it is to making a buyingdecision,is not easy to come by.In fact it is one of the last details a franchisorwill provide you with. Why? Well in an effort to protect franchise buyers fromexaggerated earnings claims the FTC has disallowed anyfranchisor or broker from making potential earnings claims.This makes for a difficult presentationas that is generallythe first question a prospect asks.How much can I make? While protectingconsumers on one level this gag order has harmed them on another.As it stands the prospectivefranchise buyermust first engage the franchisor,become qualified,fill out an application, have several discussions and onlythen theywill be mailed the FDD. (Franchise Disclosure Documents) Within the FDD the franchisor maylegallydisclose their earnings in what is known as the item 19 of the document. Most franchise shoppershaveneither the timenor the inclinationto research dozens offranchises, and if they do their selections are often within the same vertical market and investment level.As such theyoften reflect similarearnings.Most howeverneverlook beyond one brand. Manyaspiring franchise entrepreneurs will purchase a low grossingfranchise for100k+, spend many hard days workingon growing the business onlyto max out at 60-70k a year or even less. Theyhave bought a job. And some people are satisfied with that and growlaterallythrough multi unitownership. The question is - would theybe happyto learn that other franchise owners in their city who invested the same amount are working equal hours and are grossingover2 million a year? Unlikely. There are two options in this case. You can either engage multiple franchisors in several verticals,take the time to go through the process and obtain their FDD (make sure you ask upfront iftheyhavean item 19 earnings disclosure as not all do) or you can engage a franchise broker and request theyguide you towards higher historical earningfranchises within your selected segment. Historical earnings ofcourse are no guarantee offuture success and establishingcompatibilitywith individual skills,backgroundand life goals should be the primarygoal. That beingsaid manypeople prefer to avoid lower grossingfranchises if other suitable options exist that offer potentiallyhigher ROI. Mistake #3 Buying a Job // Page 7 Top 10 Mistakes Franchise Buyers Make Copyright 2014 Fran5
  8. 8. Everyone wants to be the smartest and the brightest at everythingtheydo. It is a natural human condition.We often feel we know more than everyone else. But when investigating franchises our own ego can be costly . Alongwith our ego comes the natural humanneed for safety. We all want to protect ourselves from negativeoutside influence.We are especiallywary of anyadvice. In a post Madoffworld this mistrust ofother peoples suggestions ranges from the waitress promotingthe special of the dayto the Realtor suggestin

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