Knowing the steps to acquire a franchise is important whether you want to enter your first franchise business or are a veteran franchisee eager to expand your network of locations. Below, we’ve documented eight recommended steps to acquire a QSR franchise, plus an additional tip at the end.
- Find the franchise
- Know the FDD
- Research the franchisor
- Look into the seller
- Check transfer requirements
- Examine the financial books
- Get an accurate valuation
- Find your financing
Step 1: Find the Franchise
It may seem obvious but finding the right franchise to buy is where everything begins. You can ask other operators in your desired market area if they have any interest in selling, but that can take a significant amount of time and effort. A better approach is to use First Franchise Capital’s® Exchange, which is your connection to acquisition opportunities. You can find information about owners who are eager to sell their locations, or you can simply sign up to receive automatic alerts when new opportunities become available.
Step 2: Know the FDD
Companies that franchise their business concepts are legally required to develop what’s known as a franchise disclosure document, normally described as the FDD (and also known as the Uniform Franchise Offering Circular). While it may appear to be an informational guide, an FDD is actually part of the legal contract between the franchisor and its franchisees. You’ll legally have 14 days to review it and cannot purchase and operate a franchise if you’re unwilling or unable to sign the agreement in good faith.
The FDD includes all sorts of valuable information, including:
- advertising and marketing
- mandatory suppliers
- quality control
- required purchases
- royalty fees and other costs
- support offered to franchisees
- the franchisor’s financial health
Again, because the FDD is a legal document, it's important to read it carefully, make sure you understand it, and ask questions or obtain clarifications about anything unclear. It’s an even better idea to have an attorney who specializes in QSR franchising review the FDD before you sign it. Attorneys who don’t work regularly with franchisees may not know what provisions are normal and which create concerns.
Step 3: Research the Franchisor
The current owner may be eager to sell and say positive things about the franchisor to encourage you to make the deal. While some franchisors are well-run organizations that become trusted partners with franchisees, some aren’t as good. That’s why it pays to do your own research into the franchisor and its reputation. Reach out to owners in other areas and ask about their experiences. If you hear a lot of grumbling about how franchisees are treated or the requirements they face, you may want to rethink your plans.
Step 4: Look into the Seller
Franchisees decide to sell for any number of reasons. The current owner may be retiring, going through a divorce and needing to liquidate assets, or just wanting to scale back, all of which are valid reasons. But it could be the franchisee is selling because the location is performing badly, or they have a difficult relationship with their employees. The seller's reasons will give you valuable insight into whether it makes sense for you to buy.
Talk with other businesses around the location and business leaders in the community to get a sense of the current owner's reputation. If the owner's actions or attitudes have angered neighbors or others, you're likely to inherit those problems.
Step 5: Check the Transfer Requirements
Although franchises are independent businesses, the franchisor may maintain contractual control over who is allowed to own and operate a location. After all, the franchisor’s overall reputation depends upon the performance and behavior of their franchisees. Make sure you fully understand any restrictions related to franchise sales. They’ll affect you as a buyer and may affect you again down the road if you later decide to sell.
Step 6: Examine the Books
The seller should be willing to give you access to at least three years’ worth of financial records such as:
- balance sheets,
- income statements,
- profit and loss statements,
- outstanding debts and debt service, and
- cash flow summaries.
If the seller isn’t forthcoming with such records, it’s a warning sign. Ask your attorney and CPA to look over the records as well, so they can give you their own assessments of the financial health of the franchise.
Step 7: Get an Accurate Valuation
Franchisees can put any price tag they want on their business. It's your responsibility to determine whether the asking price is fair and realistic based on factors such as potential income, building and land, equipment and other assets, inventory, and the location's reputation. Instead of guessing on your own, it's prudent to have a professional business appraiser who specializes in the QSR industry study the business and give you an accurate value range.
Step 8: Find Your Financing
Now that you’ve identified the franchise you want to buy and have performed all your due diligence, it’s time to think about how you’ll finance your franchise acquisition. Most franchise buyers do not have all the cash they’ll need on hand, so they have to obtain a business loan.
There are many potential sources for business loans. While local banks may aggressively market loan services, it may be difficult for QSR franchisees to qualify for affordable financing. Some bankers offer access to Small Business Administration loans , but that can involve time-consuming paperwork and approval decisions, as well as unfavorable requirements such as personal financial guarantees.
That’s why a growing number of franchise acquirers are turning to specialty lenders like First Franchise Capital. They understand the differences between concepts which may not be apparent to traditional lenders. Additionally, specialty lenders have the flexibility to customize lending packages based on the franchisee’s specific needs, all without requiring personal assets as collateral to support the loan.
Bonus Tip: Make Time for Training
Once you have acquired your new franchise, make sure you take full advantage of all the training resources the franchisor provides. Some companies offer their own “universities” for new owners, while others may provide an opportunity to shadow a successful franchisee in another community. The more you know about the day-to-day operations and needs of the franchise, the better you’ll be able to oversee staffing and other management areas.
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