Question:
After an 18-year career at a major multi-national company I was recently given an "early retirement" from my upper management position. Rather than dust off the golf clubs, I've decided to go into business for myself. Franchising seems the best option at the moment, as I'd like to avoid some of the more common headaches involved in a start-up operation. My question is, am I better off dipping into my retirement savings and home equity to cover the $200K - $300K in setup costs, or should I look into getting an SBA-backed loan? I have excellent credit, so I don't think I would have a problem getting the loan, but why incur the financing costs if I don't have to?
Answer:
Since I'm not a golfer, I agree wholeheartedly with your strategy. Besides, running a successful business is infinitely more enjoyable than golf. You raise an excellent point. From a personal perspective, I prefer to avoid SBA loans because of the rigid personal guarantees that they require. I am not opposed to debt, because it makes sense quite often to use your capital to grow the business. It really comes down to a personal preference and what the needs of the business may be after you take over. That is why my preference is to negotiate seller financing where you can obtain more favorable terms, you have the benefit of leveraging your assets and you still have access to your capital to fund the business' growth.
Question:
What advice do you have for negotiating the royalty fee (i.e. 6%) for the purchase of multiple franchise units? Are there rules of thumb for lowering the royalty fee when a number of units are purchased?
Answer:
Unfortunately, there are no "rules of thumb" when negotiating with a franchisor; however, you absolutely want to leverage the multi-location purchase in your favor. It is not unreasonable to at least have a sliding scale so that the more revenue generated, the lower the franchise fee. Have you asked them directly what they are prepared to do? This is definitely the best tactic to employ. Failing their willingness to negotiate openly with you, here's what to do:
In any business purchase situation, be it a franchise or not, always remember: EVERYTHING is negotiable!
Question:
I'm looking at buying an established Aamco transmision franchise. How do I figure out what to pay for it and if it's better to start it up as a new center from scratch? Most owners that own existing centers tell me that buying an existing center is the way to go, but I get mixed feelings because I ask them if they're willing to sell and some of them are.
Answer:
In my opinion you are far better off to buy an existing location than to start one from scratch. While Aamco has a good track record, a new franchise is nothing more than a glorified start- up. There is absolutely no guarantee that you will be successful. The purchase price depends entirely upon the Seller's Discretionary Cash Flow (SDCF), although some within the transmission franchise industry feel that the purchase price should be a percentage of annual gross sales (approximately 25%-30% ).
However, it's profit, not sales, that you seek. And so, using a multiple of Seller's Discretionary Cash Flow which includes: Pre-tax Profit + Owner Salary + Owner Perks + Interest + Depreciation less any foreseeable allocation of profit for capital expenditures is the formula to use. The question then becomes what multiple to use? Generally, these businesses fit right into the 1- to 3-times range.
But, there is a big difference and so you must consider such criteria as: how long the shop has been in business, are sales increasing, what does the seller contribute work-wise (actively working on vehicles or managing), any threat of competition, franchise agreement details, etc. Use $150,000 SDCF as your median. Assuming all things being equal, those with SDCF of less than $150,000 should be in the 1- to 2-times range and those above in the 2- to 3-times category.
Question:
I recently received a UFOC that had a bold warning on the front page from the State of Illinois, referring to the large numbers of transfers, terminations and closings. They seem to keep about the same number of franchises year after year, but the total number of transfers, terminations and closings each year equals between 1/2 and 1/3 of the total number of franchises. I am leery of doing business with them, but I am curious as to what may be going on there. Any thoughts?
Answer:
The only thing you can do is to do a flawless job of investigating this business. The beauty of a franchise is that you can do your research by simply contacting and visiting existing locations. You must do so. Go to these locations and speak to the franchisees directly. They will undoubtedly be the best resource for you to do determine what is really going on. Many franchisers have just one agenda and that is to sell you a franchise. This one sounds like a prime example.
While franchises may be a good venue for some people, you're far better off to buy an existing franchise resale as opposed to building one from scratch. This way, you get the best of a franchise and an existing business with historical data, built-in customers, infrastructure, and an immediate cash flow.
Question:
I'm interested in buying an existing transmission franchise. My attorney says it is usually difficult to make any modifications to the franchise agreement. That doesn't mean I shouldn't try anyways. I was wondering if there's anything that I will have greater success negotiating with the franchisor on, like transfer fee $6,000, training fee $3,000, etc. My perspective is this: the franchisor is in need of a good franchise candidate, so should be somewhat accommodating. I would appreciate your opinion on this.
Answer:
I agree with both you and your attorney (rare when that happens). While most national or well-known franchisors will not alter their agreements (or at least say so publicly) it absolutely behooves you to try. This is especially true in cases where your situation may be unique or you can provide them with an opportunity such as improving the location you are buying. As for the transfer fee, this is a perfect example of what can be negotiated in a franchise agreement. These are NOT set in stone, no matter what any franchisor tells you. Moreover, it is something that you can clearly negotiate with the seller and let them pay all or part of it.
So, while I understand what your attorney has said, I am in full agreement with you that not only should you consider negotiating, you MUST do so. The franchisor does not want to deal with failed locations or having too many resales on the market. If you can demonstrate that you will be a good franchisee for their network, and you are prepared to move fairly quickly in closing the sale, you will get some concessions.
By: Richard Parker: President of The Business Buyer Resource Center and author of How To Buy A Good Business At A Great Price©