Thinking Long-Term when Selecting a Franchise

managing labor risk

By Sean Bock, Vice President of Development, Fun Brands

Sean BockThe franchising world does a wonderful job of recruiting, training, and advising small business owners on how to own and operate their own franchised business. Before they open their doors, a franchisee typically has experienced at least one to six weeks of training, during which the franchisor shares their years of experience on their training, construction, and opening process so that the franchisee can capitalize on the collective wisdom that the franchisor has perfected throughout years of operation.

Unfortunately, many franchisors miss a critical step: assisting the franchisee while transitioning ownership. It sounds counterproductive, but a close look at job duration data shows that having a transition plan in place makes a lot of sense. Studies have shown that the average American worker will work for at least seven different companies during their career; logic dictates that a transition for a franchisee is inevitable.

But this doesn’t have to be a negative; in fact, many franchisees enter a system intending to exit within a set period of years, and evaluate franchise systems accordingly before making their investment.

What to look for when selecting a franchise opportunity

When choosing a franchise, take time to investigate what type of support the franchisor provides towards re-selling franchisees. You want to make sure the franchisor will follow through on their commitments, and that their promises of support are not just part of a sales pitch.

Here are some questions that you can ask to make sure you’ll be supported when it’s time to transition:

  • Does the franchisor have a formal program in place to help advertise the opportunity, funnel existing leads to the opportunity, and help qualify the leads that can be sent to the seller?
  • Does the franchisor provide ongoing training to help maximize the value of their business by properly managing the finances of the business?
  • If a lender is involved in the transaction, does the franchisor actively manage communication and education on the franchise concept with the lender?
  • What type of training does the franchisor provide to the buyer so that they may feel comfortable that they are getting into the right business for them and their family?
  • Can I speak to former franchisees who have left the system and can validate the support that I would receive as a selling franchisee?

Other concerns while managing a franchise

In addition, the majority of franchisees don’t manage their business to maximize their sales value. Most franchisees will operate their business to minimize their tax liability, and may throw in expenses that are not directly related to the operation of their business. This is a big mistake.

When a buyer, and more importantly a lender, reviews the previous years’ tax returns, it is a difficult position for the seller to explain that they were much more profitable than what the tax returns reflect. Lenders will lend on the tax return results, not on unaudited financials that the seller “swears” are the most accurate reflection of the business.

Whenever you are looking to enter into a business transaction, also keep in mind what your most likely exit scenario would be. By keeping these tips in mind, you should have more assurances that the franchisor you are committing to is as committed to helping you maximize the value of your business during your exit as they are with your commencement in their franchise business.

About Sean Bock
Sean is the Vice President of Development for Fun Brands and is responsible for the organic growth of dynamic brands like Pump It Up, Bounce U, and Fun Brands Carousels. He has an MBA and JD from the University of Missouri and has served as a board member for Antigua Enterprises, a publicly held company in the golf apparel industry.
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