In the first installment of this series on How to Buy a Franchise for Sale, I discussed the pros and cons of buying an existing store versus opening a new one. I also recommended exploring multiple channels to increase your chances of finding the right franchise to buy.
Once you’ve found a few interesting opportunities worth investigating further, you are now ready to take the next steps in the due diligence process.
3. Mystery Shop the Franchise for Sale
Once you’ve identified the specific location of the franchise for sale, and before meeting with the seller in person, I recommend that you conduct some direct intelligence gathering by doing some mystery shopping in the store.
From my experience as a (former) UPS store owner, it’s very easy to tell when someone is just snooping around without any intention of buying. This can make the owner or employees suspicious of your intentions so make sure to be very discreet. I suggest that you buy something small or at least ask a few questions that a typical customer would ask.
One very important thing to remember is to avoid even the slightest suggestion to the employees that the store is for sale. Having been in the shoes of the seller, I didn’t want my employees to fear losing their jobs or think that the store was not doing well financially. Let’s leave it to the seller to pick the right time to tell his employees about the sale. After all, you might end up walking away from the transaction at any point for whatever reason.
A few things to look for during your mystery shopping excursion:
- What is the physical condition of the store? Is it being maintained well? Are the restrooms clean?
- How busy is the store? Try going a few times, both during peak and off-peak hours.
- How busy is the strip mall where the store is located? If it’s not in a strip mall, how busy is the street and how much foot traffic does it get at different times of the day?
- What is the parking situation?
- How do the owners and employees interact with their customers? How is the morale of the people working in the store?
- How engaged are the customers?
Don’t think that a poor showing during the mystery shop is automatically a bad thing. In fact, this may be an opportunity for you to purchase a poorly run operation on the cheap and easily turn it around by offering a better customer experience.
However, if the weakness is due to the location itself — for example, poor foot traffic or difficult parking situation — I’d consider these inherent weaknesses that are very difficult, if not impossible, to overcome.
4. Investigate the Franchise Opportunity with the Same Due Diligence As If Opening a New Store
It’s important to read the franchise disclosure statement very carefully. It usually contains a lot of legalese and rarely makes any helpful earnings claims. But it will help you understand the responsibilities of a franchisee, and learn what the franchise allows and disallows.
When purchasing an existing store, there’s a tendency to deal primarily — and almost exclusively — with the seller. I think this is a mistake because once the sale is complete, the new franchisee will become a part of the franchise system and will have to deal with the franchisor and other franchisees on a regular basis.
Take the time to get to know a few key people in the Home Office. Ask them how the particular store is doing relative to other stores in the chain. What is the particular store doing well, and where does it need to improve? Are there any issues with respect to the current owner or the local store that you need to be aware of?
In some franchise systems, there’s another layer of support in the person of the Master or Area Franchisee, who owns the right to sell and supervise franchises within his territory. The Area Franchisee, if there is one, will be your primary point of contact in the system so it’s important to have a certain comfort level with him. The Area Franchisee can make things either very easy or very difficult for the individual franchisee depending on the relationship developed, so make sure you can work with this person.
Finally, it’s important to speak with other franchisees in the territory. Ask them how they find working with the Home Office or the Area Franchisee. Do they have any major issues or problems with the franchise system? What is their impression of the particular store for sale and what do they think can be done by a new owner to improve its performance?
Obviously, the seller will portray the store in the best possible light. Getting input from all these different parties will help you get a better understanding of the store’s current situation and help you arrive at its true value.
To be continued…
Click here to read Part 1
Click here to read Part 3