3 landmines in franchise buying

Good morning readers!

Plenty of things can go wrong when you’re buying a franchise. But here are the three big ones:

• No way out

• No way up

• No way to grow

They’re all different angles on the same thing: a lack of optionality.

Last issue, I wrote about the “triple option” — how to find franchises that give you a path to exit, executive ownership, or empire. That’s the perfect world, where your options are open to you. 

These landmines are the exact opposite, cutting off your pathway to any of those “three E outcomes.”

Let’s look at each one.

—

No way out

Too many franchise buyers focus on how to get into a business, and lose sight of how they’ll get out. But if you can’t sell the business when the time comes, you’re stuck. 

Watch for these red flags when it comes to exitability: 

🚩 Not making enough money. 

Your business being cashflow positive often isn’t enough. It also has to be making enough to sell for a multiple of earnings. 

If you bought for $500K and it’s making $50K, you’re never going to recoup your investment. 

So before you buy, always consider: “how attractive will this be to future buyers?”

🚩Shaky brand reputation.

This one’s tougher to judge if you’re new to franchising, but trust your gut.

As you’re talking to the brand, visiting their sites, and going through the interview process, keep in mind they’re not just putting on a show for you… this is the impression a future buyer will get too.

And next time around, they’ll be representing you.

🚩Slow growth.

A fast-growing business sometimes freaks people out. And yes, it means there will be growing pains. 

But if there’s a steady stream of people who want to get into the brand, you’ll be in a much better place when you want to sell. 

🚩No franchisees in your area.

If the brand is growing fast, this could change quickly. 

But if you’re the only location for 200 miles, you don’t have any built-in potential 

buyers.

No way up

If you want to own a business and not just buy yourself a job, you need to be able to scale yourself out of the day-to-day. 

Watch out for these roadblocks to executive ownership:

🚩The franchise doesn’t allow it

Believe it or not, some franchises don’t let you hire a CEO/manager. I don’t advise anyone to get into one of these businesses.

🚩Slim margins

To move to arm’s-length ownership, you need to be making enough to pay a high caliber person to run the business, while still having profit left over for you. (And don’t be tempted to cheap out on an operator — you’ll have a bad time.)

🚩Complexity of operations

If you can scale the business to where you’re just interfacing with one or two team members, that’s a healthy path towards executive ownership.

But if you’re constantly interfacing with the entire team, that's a landmine to avoid. Because you’ll never be able to take your eye off the ball and work on the big picture.

🚩Can you let go?

Frankly, some people are control freaks. Distancing yourself from operations can be extremely difficult if you struggle to trust other people to get things right. 

The only person that can spot this red flag is you. 

No way to grow

Lots of franchise buyers dream of owning multiple locations. But not every franchise supports that kind of growth.

🚩The franchise doesn’t allow it

Just like above — if they don’t want arm’s-length owners, they definitely don’t want empire builders. Steer clear.

🚩Non-scalable business model

Some business models are more conducive to empire building than others. Typically speaking, brick and mortar businesses are more scalable to multiple units.

🚩No track record of empire

Never assume you’ll be the first to do anything in franchising. If nobody’s scaled in this industry before, that’s a risk I avoid. 

🚩Not buying enough territory

This depends on your expansion plans. If you want to be breaking new ground, then you need a relatively empty area. But if you’re planning to buy existing locations, density is on your side. 

Of course, you can always buy into other brands in the same region. 

This is by no means a comprehensive guide to everything that can go wrong. But these are some of the most common problems. 

The best way to dodge these landmines? 

Do your homework before you buy. 

The right franchise should give you flexibility, whether that means selling, stepping into executive leadership, or scaling to multiple locations.

Thanks for reading!

Connor

P.S. I have these conversations with people every day. So if you want expert guidance in finding the right fit, let’s talk. Book a call here!

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