Buying A Franchise... Where Do I Start? Lloyd Shears I want to tell you about my early experience in franchise ownership. I hope my 16 years experience and the knowledge I have gained will assist others interested in exploring franchise ownership. In this article, I will attempt to give you the benefit of what I have learned and what I pass along to clients. Most of us know how to buy a house. We've done it! For our first house, many of us asked advise from parents or family members who were home owners. Advise was freely given and accepted. (Since that time, we have also been happy to share our knowledge and experience. Generation to generation, home buying knowledge is passed on like a precious heirloom.) We figures out the downpayment. Make a trip to the bank to secure a mortgage and decide on the price range we are really comfortable paying for this new home. Most of us decided to invest less money than we find out we could borrow. We also do something else: we create a model. We make a list of what we want this home to have. The number of bedrooms and bathrooms. The size of the principle rooms and other options that may be important to us … fireplace, jetted tub, etc. Then, we go out looking for the home that comes closest to our model and stays in our budget. When we found it, we bought it! If it's our first home, it will almost certainly not be our "dream home". We buy what we can afford in the knowledge that the "dream home" may be sometime away and we need to start asset-building. Our grandparents did it, our parents did it, brothers, sisters, cousins. It all seems so natural. Everyone is supportive and looking forward to the house-warming party. And now we are interested in buying a business … For most of us, the whole support system that was there for the home buying is absent … even though it is in many ways similar. Often, we do not have family or friends who are self-employed. There is not that trusted source to guide us along. In fact, what we encounter is quite the opposite. We fear what we do not know and it's a natural reaction to protect those we care for from what we fear. When I set out in the Spring of 1980 to explore business ownership, I didn't find the same optimism and support from family and friends that had greeted my decision to buy a home. This was a bit of a surprise as my late Father had been very successful businessman and owning a business seemed to me such a natural thing to do. However, I also knew there were risks involved and was out to source whatever help I could find. I had set a goal of being in business by the end of the year and was determined to follow through on my plan. I mentioned my aspirations to leave my job and buy a business to my then next door neighbours. They had also looked at some number of businesses and shared with me all the information and knowledge they had gained in their search. They had looked at a number of franchise businesses in the food industry and had several books on the subject. They were particularly keen on a crepe franchise which they were certain was the wave of the future but had decided to look at everything before making a decision. Armed with the knowledge gained from them, that most franchises work and most independent businesses do not, I decided to buy a franchise. I needed everything possible in my favour. I was going into business to be successful. Failure was not an option. I set out to look for a franchise. (By the way, the neighbours did, in fact, look at everything and bought nothing.) This is the point at which we can draw on our home buying skills. Decide on the amount of money you are comfortable investing in the business and then create the model. What is it you want to achieve with this business? For most of us, safety will be important. We may want to work at home, an office, a retail-type business. We may like or dislike sales and may want a business which is part-time or which is operated Monday to Friday and from nine to five. We may want to work alone or with a small or large staff. We will usually have a certain income which we will need to achieve, set goals. Know what you want this business to do for you. In short, know yourself and what you want. Only when you know the destination can you find a business to take you there. Like many people I encounter everyday, I assume if I was buying a franchise, I was going to have something with a counter and a cash register and perhaps a deep fryer in the back … and maybe in a mall. Not to suggest that there are not many fine businesses which fit this description and many people for which these businesses are ideal. It is to tell you that I was not someone who wanted to be in either the food or retail industry. Had I created the model of the business I wanted or more specifically, what I wanted to achieve, I would have seen that I was better suited to a business service franchise where I worked with a small staff, Monday to Friday from an office. I assumed, however, that in a franchise, this was not possible and contented myself that self-employment was worth any sacrifice. I began to read business magazines and the newspaper business opportunities section on a daily basis and was pretty disappointed with what I was seeing. The business magazines listed 100's of franchises but it was impossible to become interested in a business based on a few lines in a book. I responded to two newspaper ads looking for franchisees. I had not heard of either company but both were in my investment range and both seemed to have some interest. One was a franchise in a picture framing business and the second was a novel concept … a coffee store called Second Cup. Everyone I knew was familiar with the idea of a framing shop but there was little approval for a shop selling coffee. The support of friends was not there for that business!!! I called and received information packages from both companies. These were really the only two franchises I looked at. Why? I didn't know how to find anything else. Both companies were responsive and both were in the very upper range of my budget. I was out to buy the most expensive franchise I could as I was sure the more I paid for the business, the most I was going to make! Of course, today, I know that my logic was flawed and that the amount you invest will not necessarily dictate the amount we are going to make at all. There are great franchises available in most investment ranges and much of our success will be dictated by the way we operate and how closely we follow the franchise system. Armed with a little brochure printed by the Royal Bank, I set out to explore the two options. I read the info packages and made a list of questions. I read the franchise agreement and questioned the franchisers on things I did not understand. I took the agreements to a lawyer and had them reviewed. I called a few franchisees and flew to Ontario to meet with franchisees from both systems. The only thing I was clear on was needing to know if existing franchisees were making money. I thought if they were, chances were good that I would. The picture framing franchisees were very open. They seemed to love the industry but were having their struggles building a new business. There were far fewer franchisees in Second Cup and they were far less open. However, the concept appealed to me immensely. Sure, I did not really want a retail business or to be in a mall, but this was a business I could afford and I could be in business before my deadline. I flew to Toronto to meet the owners of the company: Tom Culligan and Frank O'Dea. (Neither of the founders is still involved in the company. Today, Second Cup is publicly traded on the TSE.) Tom and Frank spent a great deal of time with me showing me stores … they had 14 and 3 were franchises. They seemed to have a system that worked and had been running the business for some years corporately. I bought the franchise that weekend!!! The picture framing company I spoke off was not successful and had I bought into that, it would have probably been a disaster. As you are no doubt aware, Second Cup continued to grow into a large system. Not that it all easy. Remember, I bought into an "industry" that did not exist. Everything we did was new and groundbreaking. On the one hand, this was exciting and on the other, eternally frustrating. The simple truth is, I had bought into a small, new system and I got to live with these people as they learned to be franchisor. It did not occur to me that they were also finding their way. Today, I realize how fortunate I was and tell you the risks of buying from a new franchisor and not for the faint of heart. Today, I advise clients to buy from well established financially solid companies who are industry leaders. The bigger and stronger the system, the better are the chances of your success. Name recognition, while important, is often an investment in the future. It does not matter which community you live in in Canada, some of the most successful franchises are not there yet. Franchises become big names in our community after they open and establish. The big name franchises in most of our communities were big names somewhere else before they arrived in town. The person who brought the franchise to town got a ground floor opportunity with a big name company. Of course, an advantage of being new was that there was room for growth. (If it's already everywhere, where do you expand?) By the time I celebrated my first anniversary in business, I had opened 3 stores. I was working extremely hard. Long hours and frustrations. It was not my dream business but I was making money. The opportunity came to sell the 3 stores in 1983 and realize a sizeable profit and I sold. While I had not bought a franchise with that particular goal in mind, I had discovered something which I share with clients today. Franchises are saleable assets. You can build a business and sell it … a wealth building tool. In your business plan, determine not only where the money will come from to enter to business and how you will operate but also when you plan to sell. Plan your entry strategy, operation strategy, and exit strategy. The Second Cup continued to grow and continued in many ways to become a much stronger system. Of course, this growth meant that I was no longer dealing with the founders. In 1988, the company was purchased by Michael Bregman who was also the founder of Marvelous Muffins. Armed with the experience of building that chain and along with Alton McEwen who came in as President. These men set the stage to bring Second Cup to a whole new level of professionalism. I remain greatful to both of them to this day for the wealth of business and franchise knowledge they passed on to me. By 1992, store costs, which were $60,000 in 1980, were now approaching in some cases, $250,000. There was incredible competition in the industry. Competition for locations and customers. Starbucks (not a franchise) was making their presence known and what seemed like a dozen local chains where also coming and going. With the options for buying and selling stores gone (at $60,000 it was easy to build up the business and sell at a profit, at $250,000 less likely). In that year, I sold the last of the 8 stores I had owned and left the system. Over the 12 years that I was with Second Cup, I had been approached many times by people who were interested in buying a franchise. Sometimes Second Cup but more frequently, other systems. They were wondering if I could help. What did they need to know? Where could they get information? They were in the same position I was in in 1980. In helping these people over the course of time, I learnt a lot. The major lesson was that people are risking their hard earned dollars and wanted the best possible chance of success. Let me share with you a few of the keys to buying a franchise. Begin by deciding on the amount of money you are comfortable investing and if financing will be required, how will you get it? Then, decide what the goals are in buying this business. Is it to have more money, more free time? Is it to build an asset and sell? And, what do you want to do? Model the business. Staff, no staff, hours, are they important? What about income? Only when you know what you want to achieve can you find the business to take you there. Make sure you have a very good look at several good quality franchises. You may decide on a smaller system but it's a good idea to also look at some very large, well-established systems. Once you have two or three that can get you to your goals, begin to investigate them. Most franchisers will have an info kit and a video available on their franchise. These will form the beginning of exploring the opportunity. They will certainly not answer all questions but will get you started. Once you review these, fill in the enclosed confidential questionnaires and return them. At this point, ask the franchisor for a copy of the Uniform Franchise Offering Circular (UFOC). This is a document required by law in the province of Alberta and all U.S. States. While the other 9 provinces do not require it, many franchisers who operate in the U.S. and Alberta will have it available. It is important as it will have a copy of the franchise agreement, list of all franchisees, and financial statements of the franchisor. Even if the franchisor does not have the UFOC document, insist on seeing financial statements. Remember, you are buying a franchise to get help both today and ongoing. You want to ensure the franchisor has the financial resources to support you long term. It is sensible to only deal with companies that are financially sound. To tell you everything you need to know and how to source it would take pages so I will save it for a later article but begin your research by speaking to the franchisees. They are the most valuable view into the franchise system you have. Just as no two people see the world the same way and just as we have never had a job where everyone is happy, the same will be true in the franchise system. You want to speak with franchisees who are happy and franchisees who are unhappy. Successful and unsuccessful. Only when you know both sides of the system are you able to make an informed decision. No two people will define success the same way. For some, it will be money; for some, leisure time; and for others, it may be working long hard hours or very few hours. Make sure you identify with and will run your business like the people who are successful and happy. Don't buy the first and only business you look at and be certain to know what you want to achieve. There may be more than one way to get what you want. Remember, if growth and wealth building are your goals, you need a simple business in which it's easy to train staff. While you may view the food industry as safe because we all eat, you will find it extremely competitive, expensive to enter, and a lot of hard work. Again, it may be the right choice for you but make sure you explore your options. Know yourself and what your skills are. Make sure you have a goal, perhaps a five-year plan and buy a franchise in which you are able to find other franchisees who have achieved what you want to achieve. Proceed with caution and buy into the largest, best established system that meets your needs. If you can find a franchise that does what you need it to do for $40,000, buy it as opposed to one that is $140,000. Buy the least expensive business that meets your needs. Expose as few of your dollars to risk as necessary. To go back to our home-buying exercise, most of us did not have the luxury of starting out in our dream home. It is also not necessary to start out in our dream business. Buy the business you can afford. Build it up. Acquire additional units. Sell it and move on to another business. The dream business, like the dream home, is frequently a destination. Include your family in the decision making process and when the decision is made, think about it for 10 days before signing documents. Make sure you are using a lawyer who understands franchising and an accountant who will help you set your business up in the most advantageous way for you. Get the best advice available. In the next edition of Canadian Business Franchise, I will introduce you to several people who were outplaced from their corporations after many years and have them tell their stories of why they decided on the franchise option.