HOW TO EVALUATE THE TRUE WORTH OF A BUSINESS

PART 13 of 21

"Buying a New Franchise—Do You Still Need Due Diligence?"

by Willard Michlin

There are over 2,500 franchise businesses for a business buyer to choose from. Some of these are very well established and can be found in every city in America or so it appears. Others are still unknown and are not well established. They are also trying to get your investment funds. The well-established and known franchises include fast food and non-food franchises. The not so well established include the same choices.

Well-established fast food franchises include McDonalds™, Burger King™, Quiznos™, Subway™, Jamba Juice™, Johnny Rocket™, Outback™ and many more. Some of these well-established franchises that are not food include the Gas Stations—Shell™, Mobil™, and Texaco™. Auto Service franchises include Jiffy Lube™, Perrfect Auto™, and Armco Transmission™. Non-automotive related established franchises include-The UPS Store™, Mail Box Etc™, Curves™, Jamboree™, and many more.

The one thing that all the fast food franchises have in common, regardless if they are well established or not is that they have a physical location, pay rent to a landlord and can not be moved except at great expense. If a location is not profitable the owner’s only option is to sell out to someone else who thinks they can do better then the first owner and that is almost always at a substantial loss. The cost to open a new fast food location including the franchise fee, equipment and location build out runs north of $300,000 and in some cases, like Outback Steakhouse™, can run over a $1 Million.

In order to assure that your fast food franchise is profitable and will support your family, you must do everything possible to get your monthly sales to be at least ten times what your monthly rent, including Common Area Maintenance (CAM) charges. If your sales are not, you are working for the franchise, your employees and the landlord, instead of for your family. This rule also applies to non-food franchises as well as most retail or service businesses that require a physical location. This rule must always be observed. I have only seen one exception to this rule-an indoor playground franchise where the rent was thirty percent of the gross income and still made a profit.

The promotional material states that over 85% of franchise locations do not go broke. What they do not spell out is that the location may not close down but the original owner may have sold out at a substantial loss to someone else that also sold out at another substantial loss. New location restaurants are famous for being sold two or three times before the price paid was low enough that an owner could make a living. But if the rent is too high, that may not even be true. The terms of a lease are the single most deadly expense of a business. I have seen food courts charge $10,000 per month with the tenants earning only $30,000 gross sales per month.

If you are going to buy a new franchise and will be setting up at a new location or you are thinking of taking over an existing franchise location, please consult an expert that knows how to evaluate a business. It has correctly been said in regards to our health that "An ounce of prevention is worth a pound of cure." It is just as true for our financial health. A few hundred or a few thousand dollars spent on reviewing the sanity of any business investment is cheap if it saves you from making a mistake of a hundred times that amount. Never forget that only one deal in twenty looks as good as it sounds.

Willard Michlin is a Due Diligence and Business Evaluation Advisor, a California Business Broker and, a California Real Estate Broker. He has published many articles and is a highly recognized Public Speaker in the Southern California business community. He is available for speaking engagements. You can always write to Willard at willard@businessbuyingservices.com and he will always answer your questions. He can also be contacted at his Ventura County, California office by calling 800-864-0420.