IBA, as the premier business brokerage firm in the Pacific Northwest, is firmly established as a respected professional service firm in the legal, accounting, banking, mergers & acquisitions, real estate, and financial planning communities. Periodically, we will post guest blogs from professionals with knowledge to share for the good of owners of privately held companies & family owned businesses. The following blog article has been provided by Charlie Magee. Mr. Magee is a the lead franchise broker in IBA’s Franchise Brokerage (www.ibainc.com):
Buying a Franchise from a Foundation of Knowledge with Confidence
Entrepreneurs, just like everyone else, want to make good decisions. It can be hard. Weighing analysis of available evidence, anecdotal information and published data are all important elements of making confident conclusions. Let’s face it, rarely are business decisions made with all the blanks filled in. This is harder for some to deal with than others. The more clear your vision for the future, the easier it will become to stay in alignment with that vision through your decisions. That’s why I always ask clients what a five year home run looks like. Still, we all reach a point where we need to move on. Often balancing your head and your heart is what’s needed to get unstuck. Yes, do your homework and then trust your gut.
Prospective franchise owners enjoy an additional level of discovery in their due diligence as compared to those who are considering starting a business from scratch or buying an existing business.
Let’s say you have a sit up in a bed lightbulb moment, and become focused on a startup idea. Where will your information come from to build your financial projections? How will you forecast revenues and budget expenses if the business is being created for the first time? Sure- you might find some general industry information and interview other business owners, though I’m not sure they would be too enthusiastic about helping a future competitor. Organizations like SCORE and the Washington Small Business Development Centers have experienced business counselors which offer meaningful guidance for business founders. However, projections are made based on assumptions, not a track record. This is one of the reasons the banking community is much less likely to lend money for start ups. It doesn’t help that startups, on average, have the highest failure rate as compared to buying an existing successful business or a franchise. Banks need to make good decisions, too.
My friends and colleagues with IBA, the nearly 50 year old business brokerage I am affiliated with professionally, are bullish about their clients (owners who want to sell their privately held existing businesses) with growing revenue, handsome margins, and bottom line profitability illustrated by at least three years of financial documents and tax returns to match. It makes sense. The thing is, though, an interested investor has only that particular business’s information to consider. Business is usually more complicated than it seems at first. So is life. The question for a buyer really becomes – will I be able to replicate and even improve the results that this business has created over some period of time – often many years. Will the employees stick around? Will I retain the seller’s best clients or accounts when the business is sold? Will I like it? After all, you get the keys and a short transition from the seller who probably now has his schedule filled with tee times. In other words, it’s going to be up to you. Just like life – no guarantees. Still, the existing financial performance generally produces confidence in buyers. Confidence doesn’t come free. You pay for that track record and the more likely it can and will be replicated, the higher multiple you pay for the business. Get ready for four and often five figure debt service on a monthly basis. And, it may be the best thing you ever do.
Consider a franchise. Proven business model? Check. Financial performance representations (item 19 in a FDD) from a franchisor? Check. Initial and ongoing support to foster successful launch, growth and scale? Check. Plug and play marketing? Check. I’ll stop there. I’m a fan of franchising, but my own experience has shown what you probably already know – not all franchises are created equally. There are 4,000 of them in the US with a wide breadth of overall quality. The good ones are not necessarily good for everyone and the bad ones aren’t good for anyone. The journey of exploring franchise ownership is best made with an experienced guide. It’s like having a caddy on a very difficult golf course you’ve never played before. You can carry your own bag, hit the blind shots and hope for good outcomes. What a good caddy (experienced franchise consultant) will do is guide you through a process which leads to confident decision making and good outcomes.
The due diligence process is different (and better, in my view) for evaluating franchise opportunities compared with beginning a new start up business or existing businesses for sale. The biggest difference is a prospective franchise investor has the opportunity to interview and learn from existing and past franchisees from that brand and franchisor. This is called validation. Approach those owners with respect and the appropriate preparation and education that comes from a strong franchise development professional. The anecdotal information which can be gathered from these conversations can greatly reduce uncertainty and increase confidence. If an existing franchise owner from a similar market with a similar career background describes an experience where they are meeting and exceeding their financial and personal goals – that’s something you need to hear. The B Side of that record is important, too. What if an existing or past franchisee in a similar market has really struggled and failed to meet their objectives? That’s a sad song, but you need to listen to it.
How good are most of us at looking in the mirror and pointing a finger at who we see? Not great, I’d say. Predictably, the franchisors lean toward blaming failed franchisees for not following the proven model, being un-coachable, not dedicating the time and resources to properly launch and grow the business. Often they are right. And, they usually won’t suggest that the culprit was their flawed model, lack of effective training or excessive fee structure that caused the difficulty. And franchisees? “Not my fault,” is a common refrain. There’s usually responsibility on both sides of the aisle – for the good, and for the not so good. Qualified candidates properly prepared and matched with the right franchisors will usually lead to effective strategic partnerships and favorable outcomes. Win-Win.
What matters the most is the why, when, how and what for new or experienced business owners. I heard said that with a big enough why, the what doesn’t matter. Not sure a reluctant decision maker and late adopter like me can take a big bite of that apple, but I get it. And it’s been true. The burning desire you have to succeed, to make it work, to overcome the obstacles, to solve the problems, to build relationships, to serve your community, your team, your family -that’s what is going to make the difference. Once your “why” is clear, the easier it is to move forward. Give yourself a time limit. It helps. Seek the advice of experts, but trust your inner voice. Nobody understands the inner motivations and nuances better than you.
After knowing your “why”, the next most important question requiring a confident answer is this: are you ready to make it happen? It’s like making a putt – see it, feel it, trust it. Go.
If you have questions relating to the content of this article or the process associated with buying a franchise Charlie Magee would welcome the opportunity to talk with you. Mr. Magee is licensed to sell franchises in Washington and also able to sell them in most other states. Mr. Magee can be reached at (425) 454-3052 or charlie@ibainc.com.
IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media, business brokerage, mergers & acquisitions, real estate, accounting, legal, and financial planning communities on subjects relevant to the purchase & sale of privately held companies and family-owned businesses. IBA is recognized as one of the best business brokerage firms in the nation based on its long track record of successfully negotiating “win-win” business sale transactions in environments of full disclosure employing “best practices”.