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.
|Helpful Resources To Assist In Selling And Buying California Businesses|
|Prabhjot Randhawa, Broker: SF Bay Area, Central Valley
I'm a Business Advisor at Liberty Business Advisors of San Francisco. 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. 209-815-3842 Cell.
|William Park, Business Broker - Southern California
Highest Volume Broker in California, Simply Check our HUNDREDS of Listings! Over 25 Associates, Speaking Dozen Languages, Helping Buyers and Sellers of Small Business since 1982, Centrally Located between Los Angeles and Orange Counties, while Riverside & San Bernardino Counties are Very Accessible.
|Jack Oh, Business Broker: LA, Orange Counties
Business broker and real estate services in the Los Angeles and Orange County areas. 10 years experience with great negotiating skills. To sell a business or buy a business in the LA or Orange County Areas phone Jack and his team at 562-787-4989.
|Mike Nova, Business Broker: North Bay Restaurant, Retail Specialist
I have over 30 years of direct restaurant industry experience, including my personal experience as a restaurant owner. For the last 7 years I have worked as a Broker specializing in this challenging and ever changing field of restaurant and bar sales. Contact me at 510-708-6682 Cell.
|Shalonda Chappel: Escrow & Bulk Sale Services - Southern California
Escrow services to brokers/agents, sellers, & buyers. Established 43 years. Extraordinary service. Experienced with handling difficult transactions. One stop for all your escrow needs: Bulk sales, lien searches, UCC searches, liquor license transfers, publishing & recording services. 951-808-3972.
|Diane Boudreau-Tschetter: Escrow & Bulk Sale Services - CA
California Business Escrow, Inc. is a full service independent escrow company serving all of California and has expertise in a wide range of escrows. Our team prides itself on providing an exceptional escrow experience. For more info phone Diane Boudreau-Tschetter at 888-383-3331 or 209-838-1100.
|Brad Steinberg, Business Broker: Laundromat Specialist
PWS is the leading laundromat broker in California. Since 1968 PWS has brokered over 2,500 laundromat sales. With over 90 employees dedicated to the coin laundry industry, PWS has 18 licensed agents, a 3 person in-house finance department, 10 service technicians and a 20 person parts department.
|Timothy Cunha JD, Business Broker: SF Bay Area
SF Bay Area experienced attorney, & business broker. I & my EvergreenGold team offer owners sound advice & expertise to build business value & achieve profitable sales. Call today for a FREE business evaluation & SWOT analysis for your business. Call me direct at 650-600-3751, 650-866-5393 Text.
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