Buying a Franchise - Due Diligence
November 03, 2022
by a searcher in Dallas, TX, USA
Hello
There's a franchise i found that's SBA 7a Qualified that's only 10 minutes from where i live in Houston.
What are the due diligence items to keep in mind that are different from a regular business purchase?
Does anybody have experience buying a franchise? or running one?
Would like to connect with somebody that's done this before.
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA
As far as what to look at, here are some things I would recommend:
1) You also want to look at the requirements of the franchisor to be qualified to have a franchise.
2) Depending on the type of franchise, you want to see if there are any pending required updates to the store. These can become costly. If there are they may be able to get included in the loan, but it also might impact the purchase price you need to pay.
3) From an SBA perspective the remaining term on the franchise agreement is very important. You want to be sure that term is 10 years or the SBA loan term might need to be reduced below 10 years as part of the purchase. If the term is less, you may be able to negotiate a longer / renewal term with the franchisor as part of the purchase.
4) For the space the franchise operates out of, you want to see what the remaining term is on the lease. If the term is less than 10 years (even with options), then you will not be able to get a 10 year term on the SBA loan. You may be able to negotiate a lease extension or options, but being sure you control the space that has been built-out for your franchise is key for most lenders and definitely a requirement for SBA loans. Also, if you are a sandwich shop as an example in a retail store, you probably want to be sure that your lease prohibits competing sandwich shops from opening up in the same retail center.
5) You will want to understand the territory you have and how close competing stores can be built to you. Some franchises will almost allow stores to be layered on top of one another. You want to be sure you are buying something where you have a territory that is protected.
6) If you are interested in growing by starting more locations in the future, you may want to see if there are other nearby territories available from the franchisor that you can get under your control, that way you have a path to grow.
7) Lastly, I would look to see why type of competing franchises exist that sell the same or similar products, and how likely those are to impact you and if there are more opening up in your market.
I hope this information is helpful. Again, happy to connect by phone.
from University of Texas at Austin in Santa Cruz de la Sierra, Bolivia
Some things to look for when evaluating the franshise system:
- Support from the franchisor for the transition period, and for the ongoing operation (very detailed explanations).
- Terrotiry policies that would protect your operations and make it posible for you to grow into a multi-unit franchise (supposing that is the path you want to follow).
- Marketing politics and resources offered by the franchisor.
- R&D practices at the franchisor level that make the brand/business relevant on the long run.
- Agreements with key suppliers and how they are setup to protect your finances and operations.
- Organization of franchisees and their interactions with the franchisor (make sure that sigle-units franchisees have a voice).
- Figuring out what a common P&L looks for fellow franchisses, how that compares to the business you are buying and to the growth strategy you are shooting for.
Hope this helps. I am always available at redacted