Talk to these three people — who are more likely to tell you ‘no’ — before handing over your hard-earned cash for a franchise business.
February 13, 2019 5 min read
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One of the principles every buyer must follow is to understand the motivations of every seller. When someone is selling a house, they’re motivated to show that house in the best possible light. Does that mean everything they tell you is untrue? Of course not. But you should still do a home inspection.
Similarly, when you’re far enough along that you have a short list of franchises you’re seriously considering investing in, you should bring in outside expertise (if you haven’t done so already). When buying a business, you want to hire people you’re paying to say, “No!” Just as a home inspector is motivated to point out every wart and flaw, you need experts to help you realistically evaluate the franchise opportunity.
Who are these people? And what are their motivations?
Start with your banker. Bankers get paid for making loans. If they can’t put their money to work, they don’t make money. So they’re motivated to make loans. But the most important factor that allows a banker to make money is the percentage of bad loans. Too many, and they’ll find themselves in the unemployment line in a hurry. Thus, a banker’s real motivation is to make only good loans. That’s why most bankers are so conservative.
A banker gets paid to identify anything that can go wrong and to be sure that the bank (not you) can recover from those mistakes. Since they don’t want a loan to go south on them, they can serve as a professional skeptic — almost like a consultant you don’t have to pay. Now that you have only a handful of franchise opportunities on your short list, you should approach your banker and present him with your preliminary financial analysis.
He may be able to point out flaws in your business plan or financial model. Or he may be enthusiastic about your prospects of obtaining a loan. Listen closely to what he has to tell you. But again, remember that he gets paid to make loans. And as long as he gets repaid (even if he has to go after your collateral), he won’t be risking much.
Next, talk to an accountant. On a basic level, accountants are motivated by their hourly fees. What keeps them looking out for your best interests? Two things. First, you can’t bill a lot of hours without delivering something of value in return. If your accountant comes back, says, “Looks great!” and sends you a hefty bill, not only will you never use her again, but you may not even pay her. And you certainly wouldn’t refer others to her.
She wants to show you she knows her business, impress you with her acumen, and stun you with her brilliance. The best way to do that is to find every little problem and false assumption possible — and then charge you a hefty sum.
The second reason your accountant is a useful ally is that she has something to fear. You pay her good money to look out for your best interests. If you invest in that franchise and it turns out the financial assumptions she developed or signed off on were flawed, she knows she’s likely to get sued (or, at a minimum, be subjected to scathing reviews on the internet). And no professional wants that.
If you haven’t yet hired an accountant, now’s the time to sit down with one and go over your financial calculations line by line. Make sure she understands every assumption and underlying premise behind your calculations.
Finally, you should hire an attorney with experience in franchising. Like accountants, they have similar motivations for playing devil’s advocate. They’re paid to be deal breakers. Unlike accountants and bankers, however, you shouldn’t get them involved in the process too early. While a good attorney will know more than just the law, many don’t have an adequate understanding of the financial side of business — and that’s not what you pay them for. Have a banker and an accountant do the number crunching before the deal gets into the attorney’s hands. If the deal doesn’t make financial sense, the contract really doesn’t matter!
Let me reemphasize one significant point here: The professionals you hire must bring quality advice to the table. That means they should have good, relevant experience. Of course, they’ll almost invariably tell you they have it. Get specifics! What franchises have they worked with? What references can they provide? Don’t be afraid to interview multiple attorneys, accountants, and bankers to see if you want to work with them. Remember, they’re vying to win your business.