Should You Buy Into A Franchise?  

analysis-227171_1280Are you considering buying a franchise to become or expand your business? As Denver accountants and CPAs, we have seen and worked with a number of businesses and franchisees in Colorado. After serving this market over the years, we have a few tips for you to consider as you weigh your options over becoming a franchisee:

1.Examine the terms of the franchise agreement carefully. Are the terms legitimate and equitable? Consider the effects a changing market will have on the terms of the agreement and your profits. Also consider marketing support provided by the franchisor. We have heard may stories of a franchise operation looking great on paper only to find that the terms and marketing support are skewed heavily in favor of the franchisor, leaving very little room for success for the franchisee.

2.Be wary of any agreement where the franchisor controls pricing. Changing market conditions can lead to a low (or negative) profit margin. If you can’t adjust pricing appropriately, your options for growth will be limited. Pricing may also vary from location to location, so be sure you have flexibility from your franchisor to set your own pricing programs.

3.The royalty fees (like many terms of the agreement) are often negotiable. As the franchisee, you make money from profits while the franchisor is paid a royalty fee, usually a percentage of sales. Negotiate this so it is as low as possible. We’ve seen a number of instances of franchisees with high royalty fees needing to add additional money of their own to make up for a shortfall; this is almost always the start of a downward spiral ending in business failure. A low royalty fee can help prevent this situation.

4.Hire a great team of advisors. You can’t be an expert in everything, so you’ll need a team of people who are. At the very least, your team should consist of an attorney, a CPA and a bookkeeper. Your attorney and your CPA should look at the franchise contract BEFORE you sign it. These two will be your go-to people for questions on agreements and contracts and the financial aspects of the business, respectively. Your bookkeeper will track your daily revenue and expenses so that you have key performance numbers to grow your business. These numbers will also help your CPA give you better financial direction and keep you within tax compliance as you navigate your growth curves.

5.Heed the advice that your team gives you. If you start second-guessing the business advice your team is giving you, remember that you hired those people specifically because they were more knowledgeable than you in their fields. Trust the advice of your experts or hire different experts.

These are just a few of the points to keep in mind when entering into a franchise agreement, but by no means all of them. If this is a path you’re considering, give us a call and put us on your team of advisors. Put our knowledge and past experience to work for you. Afterall, we are here to give you a ClearPath to business success.

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