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Closing the Deal with a New Franchisee: 5 Reasons Deals Blow Up

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Frustration runs prevalent when, as a franchisor, you invest a lot of time and money courting a prospective franchisee only to have the deal blow up in the final stages.

Having worked with new franchises wanting to grow, I commonly see five main reasons these deals go south in the final stages. Not all of these can be prevented. Especially with a new franchise, it takes time to learn different red flags specific to your industry or franchisee outreach process. Over time you can develop ways to limit deals from falling apart in the final stages, closing the deal with more good operators.

1) Not Accounting for Living Expenses

Particularly with brick and mortar locations, operators need enough funds to sustain their living expenses for up to a year and in some cases longer while the franchisee finds a suitable location, negotiates the proper lease terms, builds-out of the space and becomes profitable. Many prospective franchisees have enough for the initial investment, covering the costs to get the unit operational and required reserves. The blind spot comes when accounting for the funds they will live off of until that time.

I call this realizing that they are “too skinny to hang out.” Once that realization hits, they often quietly back out of the deal or send mixed signals.

Limit the number of deals going bad due to this by screening their financials very closely. Evaluate not only if they have the capital to purchase the unit, but how long they will be able to fund their living expenses while they become profitable.

2) Wrong Chemistry

Unlike a traditional business transaction, operators and the franchisor will be working closely for a long time to come. This means that the two personalities need to jive well.

Sometimes the chemistry is just off.

If you aren’t getting along with the potential franchisee, or vice versa, in the early stages, it will only go downhill from there. If you can’t work together in the honeymoon phase, the marriage is doomed.

Work style or particular nuances come to a head in the chemistry category. The operator needs to make sense for the model. For instance, if you have a very detail oriented and overly serious potential franchisee looking to purchase a children’s gym, you can realize the limitations of that personality style running that unit.

I’ve also seen prospective franchisees come in that insist on finding real estate prior to signing the franchise agreement. This scenario, plus additional attempts to alter from the traditional process raises potential red flags that they won’t adhere well to the franchise model.

3) Failed Financing

Banks require a specific business plan when issuing SBA loans. If you have a buyer dependent on financing, there is a possibility that financing won’t go through. This could be based on the bank’s assessment of the business model, the buyer’s credit, or the capital they have. Either way, failed financing attempts sink the deal after you’ve spent the time winning the buyer over on your business plan.

4) Another Franchise Seals the Deal

It’s common for buyers to look at 2-3 different concepts when pursuing purchasing a franchise. With that many competitors in the pool, you have a 25-35% chance of closing the deal. A lot of different factors go into the selection. At the end of the day, it comes down to which concept best matches the ideal for the buyer.

External factors can play into the equation. I’ve seen negative comments from current and previous franchisees sway the buyer towards another franchise in the final phases.

5) They Were a Tire Kicker the Whole Time

Anyone who has been in business for a while knows that tire kickers plague all types of industries. Franchising isn’t immune. Oftentimes, a franchisor will encounter a wheeler and dealer who cherishes the art of negotiation. After countless rounds of interviews, even perhaps reviewing property options, a tire kicker will keep coming back to the table with objections or concerns to be discussed.

They are never going to purchase the unit. Drop them once you realize they are only wasting your time. Over time, you’ll be able to spot tire kickers earlier, leaving them behind as you pursue real prospective buyers.

Moving Your Franchise Forward

Far before you start pursuing buyers for your franchisee, you need to partner with an experienced franchise lawyer to lay the legal foundation for your organization. From creating the FDD to helping vet the business model, I can help you position your new franchise for long-term success.

Published: November 16, 2016
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Source: Legal Matters LLP

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Robert Steinberger

Robert Steinberger, who often goes by Bob, is a founding partner of the Law Offices of Soden & Steinberger, LLP. He is adept at both creating the best legal structure for enterprises as well as setting the foundations for franchise owners and buyers. While Bob’s practice focuses on both business entity formation and litigation, his specialty is franchise law. As a part owner of a franchise, he brings a unique perspective to navigating the franchise landscape. His free Franchisor Workbook gives a head start on expanding a business empire.

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