Investing in a new franchise business – The Process & Challenges including Site Selection

Choosing to invest in a franchise business by opening new units is a different process from buying existing  franchise units.  There are greater upsides to opening new units, but with that comes greater risk.  Your appetite for risk isn’t the only factor to consider when deciding between buying an existing franchise unit or opening a new.  The other factor to consider is immediate cash flow.  Know that opening a new franchise unit means accepting the fact that the investment won’t generate any cash flow until the unit is open.  To build out a location is a relatively well know time frame depending on your location and concept.  However, what is up in the air is site selection.  Site selection can take a matter of weeks, to a matter of months or more.  The video below covers aspects of selecting a franchise to invest in.

Selecting the Right Franchise to Invest in

• Selecting the Right Franchise to Invest in:
  • Do you meet the financial qualifications of the Franchisor?
    • Find out the Total Net Worth & Liquid Capital Amounts Requirements
  • Does the franchise concept suit your skillset?
    • Retail versus B2B (Business to Business).
    • Retail Businesses – More Turnover, 7 days, location based, more steps/works to scale.
    • B2B Businesses – Shorter Hours, Less Turnover & simpler to scale.
• Site Selection:
  • Does the franchise concept under consideration fit the local market?
  • Site Selection Challenges
    • In Southern California retail vacancy rates shrink quickly & rates rise rapidly, timing is key!
  • Difficulty in finding suitable vacant retail space is a strong factor in favor of buying an existing franchise business (Known as a Franchise Resale).
  • Once a site is secured, there is a process & timeframe for planning, permitting & construction.  6-12 month process, occasionally even longer.
• Due Diligence
  • Franchisors can’t make representations about the Profitability of a new location.
  • Visiting existing locations.  This will help you get an idea of the potential of a new store.
  • Speaking with existing franchisees about their experience will help you determine challenges.
• Royalties
  • Are they Reasonable?  How do they compare to others in the same industry?
  • Georgio’s subs (Flat monthly Fee) vs other brands that charge a percentage such as Subway at 8% of gross revenues.
  • Negotiate a moratorium on royalties during start up phase.
• Ad Funds, also known as Brand Funds
  • They are used to fund advertising campaigns, such as on television, celebrity sponsors and social media.
  • How much are they? Examples: Togo’s – 3%, Subway – 4.5%
  • Is there a local market ad fund?
• Franchise Fee & Renewal
  • How long is the initial Franchise term for? How much are renewal fees?
• On Going Support
  •  Does the Franchisor offer on-going support in the form of local district managers, or a Franchisee intranet?
  • Beware of Franchisors that are going to be changing hands.  For example, going public, or going private via a Private Equity Group.
• Area Developer Agreements (ADAs)
  • ADAs are great for someone planning on opening multiple units.  Are you financially capable of building multiple units and successfully managing them.
  • Is the unit development schedule reasonable?  And Affordable?

For More information on how Just Elementary, Inc, Business Brokers can help you with the choosing franchises to invest in and assistance with site selection, contact our Client Care Manager Sonia Chhabra at  (888) 926-9193 or email cs@justelementary.com