Franchise buying: The dos and don’ts

Supplement - Franchise Guide

Deciding to buy a franchise is a big decision and there are some pretty serious dos and don’ts to consider. We’ve rounded up some of the best buying advice from a panel of franchise owners.

June 28, 2011

DO realize it’s a totally new ballgame.
“Things aren’t like they were before the economic turndown,” says Phil Fogarty, master franchisor for the Ohio, Pennsylvania and New York Weed Man franchises. “It’s a new game out there and everyone knows it’s not as easy to secure a loan. You need a lot more collateral. Don’t assume you can borrow the money off of the equity in your house or business – ways you may have traditionally gotten money. Things are just different now.”

With that being said, linking up with a franchise could potentially make borrowing opportunities more likely. Layne Sheppard, sales manager with the Winchester, Va.-based Weed Man franchise believes that trying to get a line of credit is easier for starting a franchise than a brand new business. “You can walk into the bank with a set system and present a solid business plan as well as fine examples of what other franchises have been able to do,” says Sheppard. “The banker is just looking at risk, and the less risk you present, the better chance you have of securing the money you need.”

DON'T be afraid to look outside of the box.
Considering the world of financing is a whole new ballgame, it makes sense to consider non-traditional lending options. “With equipment or trucks, you can find a lot of different financing options that don’t require you to go through a bank,” says Dan Murphy, owner, Clintar New Jersey, as well as the owner of a Weed Man franchise. “A lot of the equipment and truck dealers offer zero percent financing and it only required basic information.”

Murphy also found some financing sources online. “The Internet is very helpful to find outside financing options – just be very careful and do your homework on the company,” he says. “I have found two companies via the Internet that have financed us and opened credit lines when our bank was pulling back.”

DO talk to the franchise about financing.
The franchises know that times are tough and borrowing is a challenge. That’s why many of them are willing to help out. “In this tough economy they know financing is tough to find,” Murphy says. “Their ultimate goal is to sell franchises. If they think you are a good candidate for their company, they may finance you. Most franchises have already made arrangements with outside companies to finance their new franchisees, if qualified.”

DON’T blow your earnings.
“My best advice is to take every penny you make and reinvest it in your business,” says Stephen Loomis, owner of U.S. Lawns Philadelphia. “If you have a big year and make a nice chunk of change, don’t spend it on fancy dinners. Put it into the business and make sure you have enough cash flow for the coming year. That will build up and, ultimately, you’ll be profitable. People just need to be realistic and understand it could take two or three years – and maybe then you’ll just break even.”

Kaveh Meghdadpour, owner of the Grapevine, Texas and Ft. Worth, Texas-based U.S. Lawns franchises, says he recommends having cash on hand. “You need to be prepared to have an avenue to continue to pay your monthly expenditures while building your business,” he says. “If you don’t come into it with a cash or reserve, you’re not going to have the ability to be successful.”

DO go all the way in.
Buying a franchise can be a big and possibly scary decision, but our expert sources agree that if you decide to jump in, you really have to take the full plunge. Purchasing a franchise is not something you can do halfway. “If you’re going to go into a franchise, you have to have the confidence of the franchise,” he says. “You can’t say I’m going to do some of this the way the franchise recommends and the rest of it my own way. You have to say ‘I’m drinking the Kool-Aid.’ And then you really have to drink it.”