Buying a restaurant franchise, whether it's a dining establishment with table service or a fast food operation, requires some investigation steps that may not apply to purchasing an independent restaurant for sale.
The entrepreneur wanting to purchase a new operation from the franchisor or an existing business from a franchisee should become familiar with these buying tips.
Tips For Buying A Franchise Restaurant Include:
1. Carefully analyze the Franchise Disclosure Document (formerly called the Uniform Franchise Offering Circular) to learn important information about the franchise company and about the specific operation, if it is established. As specified by rules laid down by the Federal Trade Commission, information that must be disclosed to all prospective franchisee ten days before signing the franchise agreement, includes details about any bankruptcies or legal problems experienced by the franchisor, plus names and contact information for other franchisees. Specific responsibilities of each franchisee also will be included.
2. Don't expect that receiving specific financial performance records from franchisors is automatic. Sales and earnings figures are almost always provided by the seller of an independent company, but may not be available to a prospective buyer investigating a restaurant franchise. The Item 19 section in the FDD, titled Financial Performance Representations, is not necessarily going to include the kind of information furnished by most sellers who share books and records with prospective buyers.
3. It's critical to talk to other franchisees to learn their experience with the franchisor and with the business. Some buyers might assume that because contact information is provided for other owners in the system, their reports about the franchise always will be very positive. That's not always the case. Asking franchisees if they are successful, how long it took them to show a profit, and inquiring about problems they face is an important due-diligence step.
4. Territorial exclusivity is another assumption that some buyers might make, but at a risk. Several franchise companies, not just in the restaurant business, have a history of beefing up their competitive presence in a specific area by adding additional franchisees. The parent company's gross revenues in the district may grow as the franchisor planned, but the result may be that the involvement of more franchisees means that none of them is very profitable. There may be a larger pie, but with more slices, each participant will get a smaller share.
5. Financing assistance often is important to help a purchaser take over a franchise restaurant. Even the buyer who does not need to borrow additional funds to complete the deal should investigate the availability of financing through the franchisor, or from a lender who works with the franchisor. If the company has not been able to gain the cooperation of a business lending institution to help finance new franchisees, it may be a clue that the franchise company does not have a solid earnings record.
6. Another assumption often made by prospective purchasers of restaurant franchise offerings is that the company must be successful if there has been no record of a failed franchisee in the area. What franchisors don't always disclose is that they sometimes will take over a failing franchisee and continue to operate it, even though there's no profit to be made. The franchisor may be willing to incur the loss rather than get a bad reputation that comes from closing a restaurant. That’s another reason to talk to other franchisees in the system--the possibility of learning about individual restaurants that have not proved profitable for former franchisees.
Because there are some unique factors involved in buying a restaurant franchise, as distinct form an independent food operation, the prospective buyer is advised to follow these tips before making a fast food or restaurant franchise purchase.
About This Contributor: Peter Siegel, MBA is the Founder of www.BizBen.com (established 1994 - 8000+ California businesses for sale, 500 new and refreshed listings (many of them restaurants) daily. He consults with business buyers, business owners, small business advisors, business brokers and agents on selling and buying California small to mid-sized businesses. He is also the author of three books on the topic of how to buy and sell California small to mid-sized companies. For a FREE consultation on the best way to buy or sell a restaurant franchise, phone Peter Siegel direct at 866-270-6278.
|Helpful Resources To Assist In Selling And Buying California Businesses|
|Lee Petsas, Business Broker - Orange, San Diego Counties, Inland Empire
UBI Business Brokers has been successfully selling businesses in Southern California since 1965. Our Agents have over 100 years of experience in selling small to medium size businesses throughout Southern California. We service Orange County, Inland Empire, San Diego. Phone Lee at 714-363-0440.
|Mani Singh, Business Broker, Southern California
I have successfully represented clients sell & acquire multitude of businesses ranging from Gas Stations, Liquor Stores, Markets, Super Markets, Smoke Shops, Postal Stores, Restaurants, General Retail, Auto and Construction related. Phone me for assistance with selling or buying at 951-296-7646 Cell
|Michael Floorman, Business Broker, BTI, San Francisco Bay Area
Business Team, San Jose (Campbell) located in the Pruneyard Towers at Bascom and Hamilton. Established in 1981 Business Team with over 6600 sales to date has 1000 business listings to choose from, paid Google advertising. We offer highly trained and experienced professionals.
|Prabhjot Randhawa, Broker: SF Bay Area, Northern Central Valley
I'm a Business Advisor at Liberty Business Advisors of San Fransisco. I have over 20 years of experience in all phases of entrepreneurship. During the past 15 years my concentration has been in business of mergers and consulting. I have owned and operated over 10 businesses.
|Jeff Back, Broker: Restaurant Specialist - SF Bay Area
J. Back & Associates Restaurant Real Estate was founded in 1988 as the first bay area real estate company to specialize exclusively in restaurant real estate. I am the past President of Charley Browns restaurants and have been involved in the restaurant business for over 35 years. 925-736-8200.
|Ron Hottes, Broker - Serving LA, Orange, Inland Empire Area
LINK Business is a business brokerage team of 28 highly skilled and seasoned professionals. Our business brokers have over 100 years of cumulative experience & the expertise to help you buy or sell a business in the LA County, Orange, Inland Empire areas. Call Ron for a consultation at 310-539-8300.
|Raj Parikh, Business Broker - Inland Empire
Raj has spent the past 15 years as a Business Broker, Owner & Developer. He has extensive experience and deep knowledge in many different industries. He specializes in brokering Business Opportunities across many industries all across Southern California.
|Helen Yoo: Escrow & Bulk Sale Services - Southern California
New Century Escrow, Inc. is a fully licensed & bonded independent escrow company. Over 20 years combined experience in handling bulk escrow transactions. Multi-lingual staff that speaks your language, including Korean, Chinese, Vietnamese. Call Helen Yoo direct at 626-890-1151.
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