More often than not, I get phone calls like this from prospective franchisees. (If you want you can skip directly to my free advice at the bottom.)
Prospect: Mr. Solomon, I am looking at a franchise to buy and I would like you to advise me about it.
Me: What franchise are you looking at?
Prospect: I am looking at an ice cream franchise called Tombstone Creamery.
Me: That's just about the worst franchise on the planet. If you invest in that you will only end up with years of misery and poverty.
Prospect: They tell me it is a wonderful investment for a good small business, and everybody eats ice cream. How can that possibly go wrong? I spoke to several franchisees and they all say they are happy.
Me: They told you that because they think you are working for the franchisor and looking for anyone saying negative things so that the franchisor can retaliate against them. The truth is that this franchise is a one way street to misery and you need to run like hell. No one trusts franchisee interviews anymore. Most of them are scared to say anything real.
Prospect: I don't understand how you can say that. Can you be more specific? And if not that, what about a sandwich shop franchise?
Me: Sandwich shops are almost as bad as ice cream franchises. Don't buy one of those either.
Prospect: What don't you like about those? Do you have a good thing to say about anything? I'm getting sorry that I called you.
Me: To answer your questions one at a time, there are too many sandwich shops and price competition is eating them alive. There is oversaturation everywhere. Moreover, the prices franchisees have to pay to vendors to enable the vendors to pay rebates to the franchisors takes away all value of group purchasing from the franchisees and transfers that value to the franchisor like an added royalty. The cost of being a franchisee in a sandwich shop franchise system is over 20 % of gross sales when you add up all the extraneous costs associated with being their franchisee, not what the disclosure documents tell you.
I like very few franchises because so few are revenue credible in the sense that when you go home at night you have made any money. There are a very few good ones in net revenue terms and you may not be qualified, for all I know about you, to buy one of those.
But you haven't hired me yet, so you have lost nothing by this phone call. If you can find a lawyer who will give you this much insight into the business risks of buying a franchise, hire him immediately.
Prospect: What would you have me do?
Me: You are apparently inexperienced at small business investment due diligence. You are listening to anecdotes and not demanding any corroboration of the sales pitch. You need to revise how you go about doing your homework. I have something to share with you that may save you from bankruptcy.
Prospect: How much do you charge for that?
Me: This is something I give away so that you can prove to yourself that I know what I am talking about. Follow these 8 magical steps.
1. Go onto the Internet and do a Google Search using the words business broker in (name of your home town).
2. Contact business brokers telling them that you are looking for a business to buy and you do not want a start up. Tell them you want a business that has been open and operating for at least five years. You can give them the name of a few franchises that you think you are interested in. Tombstone Creameries and any sandwich shop franchise would be good areas to look at.
3. The business brokers will have dozens or hundreds of these that are up for resale.
4. Tell them that you need to see copies of the actual signed federal tax returns, including all the exhibits, for the last three years (five would be better).
5. All you have to do is sign a confidentiality agreement that says you will not disclose the information to others. You can disclose it to your attorney and your accountant.
6. Now you will see the financial realities of these franchises you think you are interested in.
7. You or your accountant/lawyer will be able to do realistic financial analysis based on the information in the tax returns.
8. This is the way you start looking seriously at small business ownership investment, franchised or independent. You will be amazed at the difference between what you see in the tax returns and what these franchise salespeople are telling you.
When you think you have found something you are interested in after looking at the real financial results of ownership, if you want me to be your lawyer, you can call me back.
You are welcome. But, do call me back.
Author Richard Solomon is a Franchise Lawyer with 50 years of experience in business development, antitrust and franchise law, management counseling and dispute resolution including trials and crisis management.