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The Power of Preparation When Buying a Franchise

Google the term, ‘Why is preparation important’ and you will get about a thousand hits.

Expand your search by saying something like, ‘Why is preparation important in sports/business/marriage/whatever’ and you will again see page after page of information to filter through.

But why is so much attention paid to this little thing called ‘preparation’?

Because it matters. It matters in life. It matters in business. And it definitely matters with your investments.

Confucius once said that “Success depends upon previous preparation, and without such preparation there is sure to be failure.”

How can we argue with Confucius?!

Now, I’m not an expert on sports or marriage, but I know a little something about buying a franchise and I can teach you why – and how! – to prepare for that!

In my comprehensive, 47-page guide on 10 Secrets to Franchise Success I touch on the subject of preparation quite a bit. In fact, to be fair, it’s the foundation for the entire book. And while there’s something to be said for having a carefree, go-with-the –flow kind of attitude, it’s simply not conducive with the technicalities and overwhelming task of purchasing a franchise, maintaining it and then growing your investment well into the future.

When buying a franchise, there’s power in doing your homework and in forecasting what might lie ahead. In fact, let’s talk about what happens when you don’t….

Last week, Indianapolis-based franchise Steak ‘n Shake made headlines in Denver when another of their franchisees filed a federal suit claiming that the franchise made gross misrepresentations about profit potential. Furthermore, the franchise chain allegedly imposed uniform pricing – which, the franchisees claim – wasn’t in their original franchise agreement and does not complement or match the higher cost of living in Colorado. In a final blow, the franchisees allege that labor and food costs were blatantly understated in the Franchise Disclosure Document making it almost impossible for franchisees to properly plan and budget.

The couple that filed the suit is only 2 stores in to their 13 store agreement, apparently have zero profit to show thus-far, and are hundreds of thousands of dollars in debt.

Now, I do not know the details of the lawsuit and don’t claim to know who is in the right here.  My point, however, is to illustrate the importance of detailed and thorough preparation.

Once you have decided on your franchise, all preparation begins with the Franchise Disclosure Document. The Franchise Disclosure Document serves a very specific purpose – it helps you to be well-informed about the inner-workings and history of the franchise you are potentially going to invest in. The FDD is 23 Items chock-full of the franchises’ history – bankruptcies, work history, successes and failures; all of it is in this report. You will even get a list of the names of numbers of past and present franchisees so that you can call them up yourself and hear it from the horses’ mouth. Notwithstanding this, there are nuances to the FDD.  Information that is required and information that is merely voluntarily given.

Thus, ending your preparation after reading or half-reading the FDD is unfortunately not sufficient. The FDD is a good start, but it’s really only the tip of the iceberg. Think of the FDD as a starting-point – or a map, if you will, of every avenue you need to go down and investigate before you make a decision to invest. That means after you read the FDD, you need to go deeper.

See, this information really doesn’t do you any good unless you have a professional-grade understanding of it. And since it’s unlikely that you’ll be heading to law, accounting, marketing and business school all before you open your doors for business, you simply need professional help. So, once you get that FDD, take it to the pros. Let the franchise lawyer dig into the contracts to see if their legit and then have him explain it to you in a way that sticks. Hand the profit and loss statements to your CPA and let him crunch those numbers for you to see if they really add up – but make sure he explains it when he’s done. And go ahead – give those former franchisees a call to find out why they REALLY got out of the business.

All of this is part of the preparation process and will certainly give you a better understanding of the system you are buying.

The point is that when buying a franchise, there are about a million things that could go wrong. But for every item that you prepare for and every possibility that you plan for, there is one less thing that can go wrong.

And THAT, my friends, is the power of preparation. It systematically eliminates potential disasters while simultaneously moving you a step closer to success.

So, take the time to know the franchise you’re looking into, read and understand their FDD from front-to-back, and always, ALWAYS have a Plan B.

What are you doing to prepare for your big franchise investment? Let us know so we can share your great ideas!