At some point, almost everyone dreams of having their own business. We want to be our own boss, run the show and do work that we truly love.
Sometimes it can be easier to buy an established business with a proven track record than to start one from scratch. But chartered accountant Denham Patterson, a CA and business advisor in Woodbridge, Ont. says there’s a lot to think about before you quit your job to start living the dream.
Here are seven suggestions that Denham says would-be business buyers should carefully consider before signing off on that offer-to-purchase.
1. Do your homework. Make sure there’s a market for your product or service – one that hasn’t been saturated. A motel in a small town with no tourism isn’t likely to survive very long. Nor is a manufacturer of products with a finite lifespan, like a company making souvenirs for a one of event.
2. Shore up your savings. Changes in ownership can mean changes in revenue. Will you have enough to live on while you get the business on track? Consider too that your financial circumstances may change for quite some time. Will you be able to maintain your lifestyle or scale it back if necessary?
3. Do what you know. There’s no substitute for experience. On occasion, you might have to overhaul that transmission or prepare that crème brulé yourself. Stay clear of businesses you know nothing about.
4. Include a price adjustment clause and a full disclosure agreement in the deal. Past performance and historical balance sheets won’t reveal if your biggest customer is about to pull his business or if a key supplier is going under. Nor will they warn you about new regulations that are pending or legislation that can destroy your business.
Add a proviso to the buy-and-sell agreement that will give you compensation if things don’t work out due to circumstances beyond your control. A full disclosure agreement will guarantee that you get complete information about the true state of the business, the condition of any equipment and whether it’s adequate to meet your needs and those of your customers.
5. Make sure your family supports the plan. Talk things through with your spouse and children. Everyone needs to understand that income and family time may change, at least for a while.
6. Consult the professionals. “People tend to react emotionally,” Denham says, “And think they can do it all themselves. It’s important to talk with experts – lawyers, chartered accountants and business valuators – who will give you the straight goods on the business you’re considering, and your suitability for it.”
7. Get lots of advice, and then make the final decision yourself. Listen carefully to what all the experts have to say. Then, trust yourself to decide. When all is said and done, you’re the one who will take the risk, do the work and live with the consequences.
Written by the Institute of Chartered Accountants of Ontario.
Jim Middlemiss, Financial Post
As layoffs and termination packages mount, more Canadians are looking for alternative employment. Some will consider buying a franchise.
People who have lost their jobs are "vulnerable," and should be careful, warns Ned Levitt, a franchise lawyer at Gowlings in Toronto. In times like this, "franchising lends itself to con artists and flim-flammers" who will "take advantage of naive individuals."
That's not to say you should avoid franchising. On the contrary, a franchise can present a good opportunity for those who want to own a business.
Mr. Levitt's firm recently surveyed 400 franchise owners, half of whom had owned their franchise for less than five years. The results were interesting. "The classic image is that they are people in their forties and fifties," he said. Yet, 52% of respondents were under 44 years old.
Most were men and 42% had worked as an employee in a different company before buying the franchise, while only 17% were self-employed and another 19% had worked for a franchise before buying their own. About 74% expect to own their franchise for a minimum of five years and 58% expect to retire when they cease to own it.
Interestingly, more than half considered opening a business before electing to go the franchise route. Among the variables that attracted them to franchising were: name recognition, training and support, a sense of lower risk and ease of buying into and running the business.
The most interesting statistics related to happiness, though, are: A startling 95% said they were either somewhat satisfied (25%) or very satisfied (70%) with their decision to purchase the franchise they own. "I was taken by the high degree of satisfaction," Mr. Levitt said.
That's not to say there aren't dissatisfied franchise owners. Canadian courts have heard a number of cases where franchisees have sued franchisors, either in class actions or individual lawsuits. Everyone from Tim Hortons to Pizza Pizza, Quiznos and Mister Transmission have been sued by unhappy owners.
Not every franchise is a success, Mr. Levitt said, pointing to car dealerships. "Is it a great time to buy a car dealership? I don't think so."
As well, he said the credit crunch means "you need to pony up more capital" to get into a franchise now. Before, you could buy one with 25% of the equity needed. Now, you need 50%, he said. "Younger [people] don't have that kind of equity."
So what's the popular franchising choice these days? "Hot food is doing really well right now. Grocery is doing well," he said. Also strong are business-to-business services, spurred by the growing trend for companies to outsource tasks, creating opportunities in everything from information technology to accounting. Children are also a big focus, as "parents are spending more on everything from educational to recreational. There's even a franchise called Lice Squad, which will dispatch someone to remove your child's head lice.
He said what's "hot right now" are franchises that have low start-up costs, which tends to favour business services over food and retail, where there are higher fixed costs.
Ben Hanuka, a franchise litigator at Davis Moldaver said potential franchisees need to protect themselves. "A franchisee should ensure he or she is well capitalized to survive the down market and choose a proven franchise with a strong track record"
Examine things such as the franchisors support network and length of time in business. Today, you’ll need a good business plan and a partner who will "assist with executing strong marketing plans and running tight operations," he said.
Mr. Levitt suggests potential buyers extensively research the franchise and conduct ample due diligence. Interestingly, his survey found those who had considered opening an independent business tended to conduct more due diligence than those whose first choice was a franchise.
The former group were more likely to speak to other franchisees, read company material, meet with company representatives, visit franchise locations, surf the company Web site, read franchising publications and examine newspaper ads.
Potential franchisees need a good accountant a good lawyer, and an experienced real estate professional to help scout out a good location, Mr. Levitt said, adding there is higher risk going with an unproven or newer concept than sticking with an old stalwart that has been around the block a few times and gone through downturns.
As a litigator, Mr. Hanuka said, the most common problem he sees is misrepresentation, where a franchisor promises more than they can deliver, especially in terms of sales. Another issue is lack of disclosure. "It's a growing claims [area]." Nonetheless, he says now is a good time to buy a franchise. The rising vacancy rate means for retail operations "now is probably the best time in almost a decade to locate a site."
However, Mr. Levitt warns, a franchise isn't foolproof. Consumer whims and technological advances means retail and business concepts quickly fall in and out of favour. "The world is changing, he said. The trick is to try to stay ahead of the curve and find a franchise that can survive change.