The Nuts and Bolts of Buying a Franchise
With over twenty years in franchising, friends and acquaintances often ask questions about franchises. Sometimes they are generally curious about how it works, often they are motivated by an interest in learning more about owning one. I have divided the top questions asked, and some that should be asked, into five segments in creating this blog. This is the third segment of the group.
Part 3 of 5: The Nuts and Bolts of Buying a Franchise
Getting Through the Franchise Disclosure Document
It has been called many things in the franchise world, such as a Uniform Franchise Offering Circular or “UFOC,” but the Franchise Disclosure Document (FDD) is more like the franchise owner’s play book. It is not an easy read, but it is an essential and educational part of purchasing a franchise. It is designed to inform you of all the obligations and restrictions of the franchise you are interested in purchasing along with disclosing various matters regarding the operation of the franchise. And the Federal Trade Commission requires its delivery to you. Do not be fooled, though, the FTC has not reviewed or approved this specific document. Due to this misconception and the size of some FDDs (some are as long as 500 pages); some prospective buyers do not read all of it. And that could be a costly mistake.
There are typically 23 items in the FDD covering most questions you may have. Here is an index of those items:
- Item 1: The Franchisor, It’s Predecessors And Affiliates
- Item 2: Business Experience
- Item 3: Litigation
- Item 4: Bankruptcy
- · Item 5: Initial Franchise Fee
- Item 6: Other Fees
- Item 7: Initial Investment
- Item 8: Restrictions On Sources Of Products And Services
- Item 9: Franchisee’s Obligations
- Item 10: Financing
- Item 11: Franchisor’s Obligations
- Item 12: Territory
- Item 13: Trademarks
- Item 14: Patents, Copyrights and Proprietary Information
- Item 15: Obligation To Participate In The Actual Operation Of The Franchise Business
- Item 16: Restrictions On What The Franchisee May Sell
- Item 17: Renewal, Termination, Transfer And Dispute Resolution
- Item 18: Public Figures
- Item 19: Earnings Claims
- Item 20: List Of Outlets
- Item 21: Financial Statements
- Item 22: Contracts
- Item 23: Receipt
The purpose of the FDD is basically to communicate and disclose the nature of the franchise business and the vision of management before you buy the franchise.
Possibly the first face-to-face meeting you may have will be at an event commonly known as Discovery Days. As excited as you are to shake hands with the people you hope to do business with, they are just as excited to get to know you. These meet-and-greet seminars are held to give potential franchisees an opportunity to ask questions and learn more about the franchisor in an environment with no obligation to purchase a franchise. Usually held at the corporate headquarters or an exciting destination, Discovery Days allow the franchisor to give an overview of the history of the company, explain the business operations, explore the training, discuss real estate options, and evaluate the financial investment. Typically, it is the chance to meet the corporate team as well as existing franchisees.
The recommended time to attend Discovery Days is toward the end of your search. You should invest the time and money only after you have narrowed your choice to a particular franchise which stands out above the others. You want to confirm – in person – everything you have researched and learned regarding this franchise.
And while you are studying the franchisor during Discovery Days, they are also ensuring you would make a good fit to their culture and team.
For example, The Salt Suite® hosts Discovery Days in Delray Beach, Florida. During Discovery Days, potential franchisees get the opportunity to speak individually with CEO Ryan Dodson. This is extremely important, not only because Ryan has extensive experiences as a franchisee, Master Area Developer and Chief Strategy officer for a very large franchisor, so he has a wealth of experience to offer. When you go into business with someone, it is crucial that both partners know what makes a business successful. The basis for Discovery Days is to understand the company’s direction, its management’s goals, and whether your interests align with those goals.
Financing and Start Up Costs
So that long-lost, millionaire relative passed away and you have inherited it all – no? You won the lottery? Not yet? Then chances are you are going to need a loan to finance your business. And the good news is you don’t have to go far to find financing options. A quick check at The SBA Franchise Directory (Opens in New Window) will provide a list of 600+ pre-approved franchises that the Small Business Administration (SBA) offers loans to help get the franchise business started. Some franchisors assist prospects in connecting to funding experts that help prospects explore various options. For example, The Salt Suite® connects prospects to a third party expert who guides prospects through all available options to help identify the best source for the prospect’s needs.
You may want to establish a relationship with a local bank. Having a long-term relationship with a bank may help you get financial assistance in some cases. Find a bank that will be close to your franchise location as well. The bank will still look at important details regarding the franchise, such as the length of time the franchise has been in existence, the number of franchises that are currently open, the number that closed, and the overall stability of the franchise market.
The bank will also take a close look at you to ensure you are a sound investment as well. Your credit score and personal financial history will be examined. The bank may want your small business loan to have an SBA guarantee (picking a franchise from that registry mentioned above early on saves headache and heartache down the road).
Here are a few steps to take to qualify for a loan:
- Understand that lenders will pull your credit report from each reporting agency and check the accuracy (pull all three from www.annualcreditreport.com (Opens in a New Window)). It is a good idea to know how your credit rates before shopping.
- Do not make any large purchases or big career moves (no new house or having your spouse quit a job).
- Get your credit score above 650. One way to do that is to pay off your smaller credit cards and debts.
- Save up for a down payment. Most lenders expect you to have a down payment to demonstrate that you are committed to the investment.
If you do not qualify for a bank loan and do not have a retirement plan, you may want to consider borrowing from a relative. If this is your only option, it is best to treat family loans as a professional transaction, with a loan agreement documenting the terms of the loan. Present the same paperwork to your family lender in the same manner that you would present to a bank you were borrowing from. Have a professional accountant draw up loan papers and have an attorney review its terms.
The next part of the five segments, covers warning signs and questions to ask along the way.
About the Blog Author
With over 25 years of franchise experience, Tiffany Dodson, CFE holds deep roots from senior marketing roles at well-known international franchises to recognition as a top performing franchisee, Master Developer, author, and speaker. Find Tiffany at The Salt Suite and reach her via Tiffany@TheSaltSuite.com.