Decision Vision Episode 95: Should I Buy an Existing Franchise? – An Interview with Leslie Kuban, FranNet Atlanta
Leslie Kuban, FranNet Atlanta, joins host Mike Blake to discuss the pros and cons of buying an existing franchise business vs. starting a new franchise from scratch. “Decision Vision” is presented by Brady Ware & Company.
Leslie Kuban, Market President, FranNet Atlanta
For over 30 years, FranNet experts across North America have been matching individuals with franchise opportunities through a no-cost, extensive educational and coaching process.
Locally owned and operated, FranNet Atlanta has consistently been a top producing FranNet office. Our team of experts has helped over 500 individuals and families choose the best franchise brand for their needs and goals.
After a rewarding chapter with Mail Boxes Etc. (now the UPS Store), Leslie and her father launched FranNet Atlanta in 1999. They’re well versed in growing a family business during strong economic times and in recessions. They’re proud to have helped over 500 individuals and families choose the best franchise brand for their needs and goals.
Leslie became an Amazon bestselling business author as one of 15 franchise industry thought leaders contributing to More Than Just French Fries, a collaborative work on successful business ownership through franchising. Leslie is featured in Chapter 9: Family Ties, where she discusses multigenerational franchise ownership. Leslie has won 17 awards within FranNet since 2001 and is a graduate of Vanderbilt University.
Connect with Leslie on her company website and on LinkedIn.
Mike Blake, Brady Ware & Company
Michael Blake is the host of the “Decision Vision” podcast series and a Director of Brady Ware & Company. Mike specializes in the valuation of intellectual property-driven firms, such as software firms, aerospace firms, and professional services firms, most frequently in the capacity as a transaction advisor, helping clients obtain great outcomes from complex transaction opportunities. He is also a specialist in the appraisal of intellectual properties as stand-alone assets, such as software, trade secrets, and patents.
Mike has been a full-time business appraiser for 13 years with public accounting firms, boutique business appraisal firms, and an owner of his own firm. Prior to that, he spent 8 years in venture capital and investment banking, including transactions in the U.S., Israel, Russia, Ukraine, and Belarus.
Brady Ware & Company
Brady Ware & Company is a regional full-service accounting and advisory firm which helps businesses and entrepreneurs make visions a reality. Brady Ware services clients nationally from its offices in Alpharetta, GA; Columbus and Dayton, OH; and Richmond, IN. The firm is growth-minded, committed to the regions in which they operate, and most importantly, they make significant investments in their people and service offerings to meet the changing financial needs of those they are privileged to serve. The firm is dedicated to providing results that make a difference for its clients.
Decision Vision Podcast Series
“Decision Vision” is a podcast covering topics and issues facing small business owners and connecting them with solutions from leading experts. This series is presented by Brady Ware & Company. If you are a decision-maker for a small business, we’d love to hear from you. Contact us at decisionvision@bradyware.com and make sure to listen to every Thursday to the “Decision Vision” podcast.
Past episodes of “Decision Vision” can be found at decisionvisionpodcast.com. “Decision Vision” is produced and broadcast by the North Fulton studio of Business RadioX®.
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Show Transcript
Intro: [00:00:01] Welcome to Decision Vision, a podcast series focusing on critical business decisions. Brought to you by Brady Ware & Company. Brady Ware is a regional full-service accounting and advisory firm that helps businesses and entrepreneurs make visions a reality.
Mike Blake: [00:00:21] Welcome to Decision Vision, a podcast giving you, the listener, clear vision to make great decisions. In each episode, we discuss the process of decision making on a different topic from the business owners’ or executives’ perspective. We aren’t necessarily telling you what to do, but we can put you in a position to make an informed decision on your own and understand when you might need help along the way.
Mike Blake: [00:00:41] My name is Mike Blake, and I’m your host for today’s program. I’m a director at Brady Ware & Company, a full-service accounting firm based in Dayton, Ohio, with offices in Dayton; Columbus, Ohio; Richmond, Indiana; and Alpharetta, Georgia. Brady Ware is sponsoring this podcast, which is being recorded in Atlanta per social distancing protocols. If you like this podcast, please subscribe on your favorite podcast aggregator and please consider leaving a review of the podcast as well.
Mike Blake: [00:01:09] So, today’s topic is, Should I buy an existing franchise? And we’ve had a couple of shows on franchise topics before. We have had a show early on with Anita Best to talk about, you know, should I, basically, buy into a franchise system and start a new franchise? We recorded a couple of weeks ago, and it will be out by the time you hear this but it’s not published yet as of the date of this recording, with Lauren Fernandez where we talked about the decision to take your existing business and to become a franchisor. And then, to kind of complete the three-legged stool here, we’re going to talk to our next guest about buying an existing franchise. And I think that’s a different discussion. We’re going to find out just how different. I could be entirely wrong. It could be a boring podcast. But I don’t think I’m wrong. I think there are some subtle differences that, despite their subtlety, are important.
Mike Blake: [00:02:10] Because buying something that somebody already has up and running is different from starting something new, good or bad. You can buy something that’s already been successful and then your goal is to not run into the ground. Or, you could buy something that has its own problems, kind of like buying somebody else’s car. You may be buying into their problems and you need to understand kind of where they are. And there are different implications in terms of the capital required and value. When you open a new franchise location or you’re a new franchisee into a system, you know, your cost is largely startup costs and you’re trying to capitalize to make sure that you have sufficient capital to develop and grow the business and survive for, at least, a little while in case the business doesn’t take financially right away.
Mike Blake: [00:03:07] Whereas, with an existing franchise, just like any other business, if it’s already successful, an owner is rightly going to expect to be paid for the fact that they built and own a successful business that is an income-producing asset. So, it is different. And this kind of topic, I think, given where we are with coronavirus where a lot of people are in transition, the data shows that people are now considering and launching into being their own boss and being the owner of their own company in numbers that we have not seen for a long time. And I think this is by necessity. There have been massive job losses. We’re still hovering 800,000 and 900,000 new unemployment claims a week, which by American standards is very high. And there are industries and jobs that are not coming back. I mean, it’s unfortunate. It’s hard to hear. But, you know, the people who are going to successfully transition are going to be the ones who make peace with that earlier than later and take aggressive action as to what their next step is.
Mike Blake: [00:04:19] So, I think this is going to be a good show as just about all of our shows have been, thankfully. And joining us today as our expert is my friend, Leslie Kuban, of FranNet. FranNet helps their clients buy the right business so that they can make income they need in a business they enjoy. FranNet are experienced local franchise experts, consultants, and brokers that help you match the perfect business opportunity to meet your goals. They assist with identifying franchises for sale, matching the right franchise to the right buyer, and performing due diligence.
Mike Blake: [00:04:53] After a rewarding chapter with Mail Boxes Etc. – now, the UPS Store – Leslie and her father launched their franchise consulting business in 1999. They’re well versed in growing a family business during strong economic times and in recessions. They’re proud to have helped over 500 individuals and families choose the best franchise brand for their needs and goals.
Mike Blake: [00:05:14] Leslie became an Amazon bestselling business author as one of 15 franchise industry thought leaders contributing to More Than Just French Fries, a collaborative work on successful business ownership through franchising. Leslie is featured in Chapter 9: Family Ties, where she discusses multigenerational franchise ownership. Leslie has won 17 awards – that I can account – within FranNet since 2001 and is a graduate of Vanderbilt University. Leslie, thank you for coming on the program and welcome.
Leslie Kuban: [00:05:44] Well, thank you. That’s quite an introduction. I appreciate it.
Mike Blake: [00:05:48] Well, it’s your fault you did all those things. So, before we get started, I got to ask you a question, because as I was preparing for the show today, and you and I have known each other for a bit, but I didn’t realize something that, actually, you started that Mail Boxes Etc. franchise right out of school, didn’t you?
Leslie Kuban: [00:06:05] I was not even a year out of college. And so, I didn’t know a whole lot about business. So, I think it’s a good example of if I could do it, then anybody should be able to learn it and do it.
Mike Blake: [00:06:18] I mean, I want to get some of that background story. This isn’t what we brought you on for, but I do think it’s a really interesting conversation in itself. I mean, it it seems very daunting. It seems almost impossible to imagine that you graduate from college, here’s your degree, and then, bang, you’re a franchise owner. Can you talk a little bit about kind of how that happened and how you made that happen?
Leslie Kuban: [00:06:45] Well, I had some help. I mean, that’s for sure. And to be fair, I can’t say my experience was completely cold. My father had been in franchising for a long time prior to that. And a very actually similar story to most people that I work with today, he had a long career and a big company, 3M. It was all he ever knew. Corporate reshuffling happened for him and had him look at business ownership as a career option. And franchising was how he entered into business ownership. So, I grew up around small business. We had a successful sign company. He had dealt with some other franchise brands. I managed a MotoPhoto franchise in high school that he had been involved with. And so, it wasn’t really my first rodeo.
Leslie Kuban: [00:07:34] But I graduated college. I didn’t really see myself wired to go do the corporate thing. Back in the day, Andersen Consulting came on Vanderbilt campus with their army of recruiters recruiting college graduates. And I think I was the only one who didn’t get a job offer from them because I just wasn’t wired for that. And so, I graduated school. And kind of since doing something on my own was my path and speaking of existing franchises, this was an up and running Mail Boxes Etc. franchise that my father helped me find and get into. And it was a struggling location. The owner had basically abandoned their business so I was able to take it over for practically nothing. And I made it work because MBE was a really strong franchise with great training. And I went through the full suite of franchise training, even though it was an existing location. I had all the support resources that I called every day needing help with this and with that. And that’s how I made it work and it was successful for me.
Mike Blake: [00:08:42] Well, I’m glad we went down this road because I did not know this. So, what we’re learning is that your first experience in the franchise world is exactly the topic of this conversation. You bought an existing franchise and maybe one that was underperforming, that maybe opened some doors for you. But that is, in fact, how you got started.
Leslie Kuban: [00:09:01] Yes. Yes. It sure is. So, very topical.
Mike Blake: [00:09:06] Yeah. So, good, we picked the right guest for sure. You know, you can buy a franchise and you can buy a standalone business. And the first question is, are those two things different at all or are there some significant differences that someone needs to be aware of if they’re going to look at buying an existing operating franchise as opposed to a standalone business?
Leslie Kuban: [00:09:34] I think there’s certainly some similarities but there are some key differences, and I’ll just jump into the differences. So, first of all, the franchisor is always going to reserve the right to approve the buyer. So, if I’m a franchisee and I want to sell my business or I need to exit, I can’t just go sell it to everybody or to anybody. So, any potential buyer of my franchise at some point is going to have to interact with the franchisor. They’re going to have to go through the same disclosure process and education process. The franchisor has to want that person. They have to feel like that person has the right skills and credentials and money to take that business over and make it work. So, that’s a key difference, is, if you have an independent business, there’s no one out there in reserving right to approve that transaction. Go ahead, Mike.
Mike Blake: [00:10:35] You’re right. You’re right. I do think that’s a key difference. And that segues, actually, nicely to the next thing I want to talk about, which is, in your experience and you’ve been doing this for a while now, how often does a franchisor exercise their right to block a sale?
Leslie Kuban: [00:10:52] So, a franchisor’s incentive is to further the system and grow their royalty stream and the validation and success of their brand. So, they have a franchisee who needs or wants to exit and isn’t really gung ho about participating in the business anymore. Then, it is to their advantage to help in that process and to facilitate a new buyer coming in who’s going to be committed and energized to run the business. So, the only time a franchisor would not approve someone is if they think that potential buyer just isn’t a good candidate. They don’t have the right talents. They don’t have the right commitment level. They don’t have the money. That would be the only reason I could think of that they would not approve a buyer of their franchisee who’s ready to go.
Mike Blake: [00:10:52] And in your career, how often has that happened? And I’m happy to give you a chance to apply yourself here as part of your process making sure that a buyer would not prompt a franchisor to exercise that option.
Leslie Kuban: [00:12:01] Well, I mean, in 21 years of being in my business, I can’t think of a scenario of where the buyer was not approved. Because that’s what my business is. I mean, my business is providing qualified buyers. So, if I’m doing a good job on my end of making sure that the franchise is a fit for what the buyer is looking for, they have the right credentials of what the franchisor is looking for, that usually isn’t the problem. The problem usually comes in on the seller. The seller changing their mind about selling their business or having very unrealistic expectations about what their business is worth. Kind of the same reasons, whether it’s a franchise or not, that the seller is usually the issue, not necessarily the buyer.
Mike Blake: [00:12:47] And thank you for reminding me why I got out of investment banking, because that kind of thing used to drive me crazy. And it’s why I have so much respect for people in your business, because it takes a certain mentality to be able to absorb that. Now, in spite of that sort of threat being out there, there must be a reason why buying a franchise might be more attractive than buying a standalone business. So, can you kind of walk us through what is the case for buying into an existing operating franchise as opposed to something standing alone?
Leslie Kuban: [00:13:27] Yeah. Well, I think there’s a lot of good reasons to consider that if the right types of opportunities are available to you. And some of those answers aren’t necessarily just only for an existing franchise. It’s kind of the case for franchising, period, is, it’s a great way to minimize the risk of getting into business because you have the ability to do all kinds of due diligence, whether it’s new or existing. It’s advisable to go out and speak to other franchisees about their experience running that business and their relationship with the franchisor. I mean, you could even speak to franchisees who acquired an existing franchise within that same system and get a sense of comparables and what their words of the wise would be around that. You know, there’s also the benefit of you not being the only one marketing your business. This is just a key franchising benefit as you have lots of people out there marketing the business and creating brand awareness. That’s not all your time and your money and energy doing that.
Mike Blake: [00:14:35] So, I’m glad you brought that up, because, again, I’m not a franchise expert. I don’t hold myself out to be that. But as I was preparing for the show and kind of reading through other people’s blogs and newsletters and whatnot on why you should buy a franchise, how to do it, and so forth, one thing that occurred to me that I don’t know is talked about enough is that, I think, a franchise in many ways is more transparent than a garden variety standalone business. Because the systems demand that transparency. And you have that disclosure document and you can talk to other people that literally owned the exact same business elsewhere designed to be carbon copies. You can’t do that with most other standalone businesses, right?
Leslie Kuban: [00:15:24] Exactly. I mean, you can try to go talk to some competitors. But competitors have no real incentive to help you do your due diligence if you’re going to become a competitor. And franchisees, they’ll tell you the good, the bad, and the ugly. I mean, you really get the real deal, what people like, what they don’t, what kind of money it took them to get to cash flow positive, how they financed the business, what they would do differently. There’s no crystal ball in any of this. But that’s the closest thing that I’ve seen and experienced myself that you can take advantage of when you can go out and speak to people in the same business who really would be collaborators and not competitors to you by and large.
Mike Blake: [00:16:06] You know, there’s something about franchises that I’ve learned, again, preparing for the show and others, that, the good franchises seem like communities, almost fraternities, if you will. Am I overstating that? Am I drinking too much of the Kool-Aid? Or is that a fair characterization?
Leslie Kuban: [00:16:25] I think it’s in the pathway of very fair. Like, I think I’m great friends with many of my fellow FranNet franchisees. FranNet is a franchise, by the way. I don’t know if I’ve ever shared that with you. So, in my business as a franchise consultant and broker, I’m a part of a brand. I have a franchise agreement. I pay the royalties. So, yeah, I’ve become great friends with many of my fellow FranNet franchisees. We vacation together. We help each other. If we’re troubleshooting ideas, that’s usually my go-to is brainstorming with some of my fellow colleagues that are not competing with me but collaborate with me. So, we’re all on the same team and we wear the same jersey, which is a lot of fun.
Mike Blake: [00:17:12] So, on the less fun side, but I think a reality, is that I’ve seen instances where a franchisor sometimes forces a sale. Well, I’m just going to stop there. Is that true? And why does that happen? And in your mind, from a biased perspective, is that a red flag or a bargain opportunity?
Leslie Kuban: [00:17:37] So, what I’ve seen, I can’t say that I’ve ever seen a franchisor force a sale. But, certainly, they will terminate franchisees who are uncompliant. And some typical grounds for termination would be a real backlog of not paying owed fees and royalties. Most franchises have a minimum performance standard of some kind to stay a part of the system. You have to meet a certain revenue level. They may calculate that differently, but they’re not going to allow franchisees just to be dormant, sitting on territory, doing nothing. So, I’ve definitely seen franchisors terminate franchisees who have abandoned their business or are way out in left field in terms of what they need to be doing. But I can’t say that I’ve ever seen a franchisor force a sale, that contractually forced a sale.
Mike Blake: [00:18:41] Okay. Again, you’re the expert. I’m not. But in the limited work that I’ve done – and this is probably why I’ve gotten involved with my hat as an appraiser – is that, I have been involved in one or two instances where it was effectively a nonperformance issue. And the franchisor doesn’t want bad franchisees out there, because that can be, for lack of a better term – there probably is a better one – but it can be cancerous on the brand, right? If the one location of a franchise, the only one that a big part of the market sees, that does cast a blight and makes it difficult for others to kind of establish and maintain their brand and reputation.
Leslie Kuban: [00:19:26] It is the franchisor’s responsibility to protect the investment of their other franchisees to deal with rogue franchisees who could be damaging the brand and other franchisee investments.
Mike Blake: [00:19:40] Well, yeah, that’s right. And I’m sure that often a lever that is used, if it’s not outright forcing the sale, is that there is a threat out there that you’re not guaranteed a franchise for life, right? So, either shape up, ship out, or sell out. But one way or the other, this thing is changing.
Leslie Kuban: [00:20:01] Yes. Yes. So, I think, actually, you know, selling your business and maybe getting something for your investment versus an outright termination, in my mind, would be attractive to the exiting franchisee. And it could definitely be a bargain for a new franchisee coming in. They’re probably going to have some problems to fix, some things to clean up, which will require investment of time and energy and money. So, it probably isn’t going to be worthless, but it could be a good opportunity, definitely.
Mike Blake: [00:20:36] So, let’s take a step back here, because we’ve gone into the weeds, which is good, I want to do that. But somebody may be listening right now or is going to be at this point on the podcast saying, “Okay. This sounds great. Where do I start? How do I identify a franchise that’s potentially for sale?” I mean, do you open up Craigslist? Does somebody email you? Do they find them on Facebook marketplace? How do you start? How do you identify something for sale?
Leslie Kuban: [00:21:06] So, I think some of the common channels, bizbuysell.com, of course, is the largest online marketplace. But a good business broker friend of mine said, “You know, what you ought to do is have a good stiff drink before you get on BizBuySell and just kind of peruse what is out there.” Because the reality is, there’s so much garbage out there. So, existing franchises is about 20 percent of my business. And the reason it’s not more is because finding good opportunities is hard. And so, BizBuySell would be a place to start. Certainly, some business brokers, the way it works in my world is – you know, I’m not a business broker that’s taking listings – when a franchisor knows of one of their franchisees who’s ready to exit the business for whatever reason, they’ll call me and give me some information about that business. But I’m not seeing or evaluating or auditing the franchisee’s financial statements, but it can be one of the arrows in my quiver of potential opportunities. So, I’m a source for those kinds of opportunities. But, still, if you’re really bent on buying an existing business, I would just plan on taking quite a while and having to kiss a lot of frogs before you find the right opportunity.
Mike Blake: [00:22:29] Okay. So, you said something that I want to drill down on because I think there’s a real opportunity here to educate. You look at BizBuySell listings and a lot of them – we’ll just go ahead and use your vocabulary – are garbage. For somebody that has a trained eye like yourself, what are the things that you look at and you can spot, that somebody like me who is not a franchise expert would miss, and say, “Okay. I already know looking at it for two seconds, it’s not worth my time. Nothing to see here. Move on.” What are the kind of things that sort of send those signals to you?
Leslie Kuban: [00:23:02] Well, the first questions that I’m going to ask are, of course, what is the performance of the business and what is the seller thinking that it’s worth? And there is usually a big divide – oftentimes a big divide – in what the seller thinks it’s worth. This whole notion of valuation is a little bit of a slippery slope, because at the end of the day, the value is what the buyer is going to buy it for and what the seller is willing to sell it for. And, usually, neither are satisfied at the end of the day. I’m sure you see that every day in your line of work.
Mike Blake: [00:23:38] It’s come up
Leslie Kuban: [00:23:39] Yes. But sometimes the seller is just in fantasyland on what they actually think the value of their business is. On one hand, it’s their baby. They put a lot of time and energy into it. And they’re looking to recoup what they’ve made from it or what they put into it at a minimum. And I actually think there’s an argument for that. I mean, one way to look at this is, if I were to buy that same franchise in that same territory as a startup, what would it cost me to get into the business and get it to where it is now? There’s an argument that that’s some kind of a baseline value. Not everybody sees it that way, and I understand that, too.
Leslie Kuban: [00:24:24] But that’s the first thing, it is the questions that I’m going to ask. Where is the seller? Are they really ready to sell? What is their plan after they sell their business? Too many times, you know, someone gets to the 11th hour of selling their business and the buyers already put a lot of time and effort into financial evaluation and hiring the attorney. And then, the seller doesn’t really have a plan for after the sale and they get scared and bail on selling the business, which is really frustrating for everybody.
Mike Blake: [00:24:56] Yeah. And expensive.
Leslie Kuban: [00:24:58] And expensive. So, right off the bat, I’m kind of asking questions around where the seller is, what their plans are, and that right there can give me a sense of if I’m even going to mention it to people I’m working with because I don’t want to waste their time.
Mike Blake: [00:25:15] There’s so much to unpack here, because a lot of what you’re talking about, I think, also applies to buying a standalone business too. The seller’s motivation, desire to sell, you know, on a failing franchise or failing business, really, one of the hurdles I think people face is, you know, we’re psychologically hard wired against loss. And so, the business owner has a construct in their mind that says, “Well, if I can just get out what I got back, I’ll be great.” But your business may not be worth what you put into it. There are businesses that actually destroy value. And, you know, it’s really about sort of get what you can. And it’ll take some time to reconcile a seller. And, unfortunately, it may take three or four, two or three failed purchase efforts or failed sale efforts to convince them that even what they put in is not a sustainable value because people keep walking off the lot, basically.
Mike Blake: [00:26:26] But, you know, it’s interesting that you put valuation very high in there. And I don’t talk about valuation a whole lot of the podcast because I don’t want to make it about me. But I think it’s very interesting that valuation comes up so early for you. And what that tells me is that, from your mindset, one thing that you think about very clearly and very early is that, does this make financial sense?
Leslie Kuban: [00:26:51] Yeah. And, I mean, in an ideal world, you want it to be a win-win for everybody. But, you know, the new buyer needs to be able to come into the business. They need to understand what could they do differently very quickly to turn that business around if it’s a struggling business. Some are very successful businesses and people are cashing out on their equity. And that’s a whole different conversation. But, you know, a lot of what is out there has some warts on it. And where the franchisor can come into play and actually kind of help with some of the stuff is in having a process for educating their franchisees. And they’re selling franchisees on what they need to have in place before they will help that franchisee sell their business. And a franchisor cannot dictate the value of the franchise. They cannot tell their franchisee, “You have to sell your franchise for this.” But they can give some strong recommendations of what is realistic and kind of coach their franchisees on how to think about it and how to position it so that they can actually exit, hopefully, in a satisfactory way.
Mike Blake: [00:28:07] Yeah. Great. This is great. You’re driving this conversation in really awesome places. So, that reminds me in a couple of the franchise scenarios in which I’ve been involved, sometimes the franchisor will even make available data on valuation multiples for what other franchises in their system have sold for. Not all the time. And I’m not even sure it happens a majority of the time. But it happens more than once in a meteor strike, basically. Have you seen that as well? And if so, how often or how accessible can that data be?
Leslie Kuban: [00:28:43] Yeah. Comparables. And I think you start to see that with more mature franchise systems. And this is kind of on my end of things, the franchisor really being my paying client. They’re the ones with whom brokers, like me, have our contract. We have our financial relationship with the franchisor. And what we see is that, sometimes franchisors, younger brands, they haven’t even thought about this until they have their first resale on their hands. And they kind of scramble with, “Oh, boy. What do we do now?” And don’t have a process in place. So, what you’re referring to, you really see with more mature brands that even have a whole resale department. I worked with some very mature brands that they have dedicated people in their franchise development departments just handling resales. But you don’t see that until the brand usually has 300 or 400 franchisees out there and enough transitions under their belt to really figure that out and have a streamlined process to help both the buyer and the seller with that.
Mike Blake: [00:29:50] So, in the intro, you mentioned something that leads to a question I want to make sure that we covered, and that is, as a new franchisee entering by way of being the buyer, am I going to have the same access to training as if I were a new franchisee? And if so, is it the exact same? Is it different in an existing system? And who bears that cost?
Leslie Kuban: [00:30:20] So, the short answer is yes. A good franchisor is not going to rely on their exiting franchisee to train their new franchisee. And things may be very different. The franchisee who is selling, they may have been in that business for 10 years, 15 years, longer. And so, advancements in the business, their systems, the services they offer probably have evolved over that lifespan of that exiting franchisee. So, I can’t think of a scenario where the franchisor is not also reserving the right to train the new buyer in the same way that they would train any new franchisee coming into the system. And the more sophisticated brands – I actually had this just happen with a recent transaction – where they’ve been around long enough to where they know that a buyer coming into an existing franchise is going to have different needs than the buyer of a new license. So, with more mature franchises, they may have an extra track for buyers of existing franchises. But, again, you see that in much more mature brands. Not in emerging brands.
Mike Blake: [00:31:30] And that’s a great question to ask about, right? And one of the things I’m learning through this conversation is that, when you’re buying into a franchise system in this way, you’re really performing due diligence in two directions, one of the franchisor and one of the selling franchisee. And one of those questions may be, “Hey, do you have a separate track to help me kind of get on board?” And that can be very comforting, right? Because if it’s a standalone business, more often than not, the seller wants to drop off the keys and retire to their condo in Costa Rica, basically, and never see it again.
Leslie Kuban: [00:32:06] Yeah. They’ve joined the circus at that point. And so, if you’re asking what might the benefit be of an existing franchise versus someone’s independent company – this is a big one – is the availability for initial and ongoing training and support from the franchisor, the collaboration with the other franchisees. It can be a game changer.
Mike Blake: [00:32:29] And that means as a buyer, you don’t necessarily have to be an expert in that business on the way in. One of my cardinal rules of investing is, a great way to lose your money is to invest in something that you do not understand. And buying a business that you don’t understand and don’t have an opportunity to get to speak quickly in a formal way, that’s just asking for trouble. And from what you’re describing, buying an existing franchise does take a lot of that particular risk off the table.
Leslie Kuban: [00:33:01] And not only that, but most franchise companies and industries – not all, but most -they would prefer someone who doesn’t have any industry experience. They want someone who has the right soft skills. Like, if it’s a business to business franchise, your key role as the owner is probably business development and sales and outbound relationship cultivation. So, they would like to see that you’ve been successful in that soft skill somewhere in your history. Or you’re confident that you have the ability to learn it. Others, you may have a lot of employees and your role as the owner is, you know, team and employee leadership and development. So, have you been in a leadership and management role somewhere in your career? But if you have a lot of experience in their industry, you’re probably bringing your baggage and your bad habits, some good habits, too. But, typically, they would rather have a fresh slate and train you in the way of their business. But you’re bringing the right soft skills to get off the ground running quickly with whatever skills are required. So, there’s a difference between skills and experience here. They definitely are looking for certain skills, but prefer that they be the ones to train you and give you the experience in their industry.
Mike Blake: [00:34:19] So, let’s switch gears a little bit here. Often – not all the time – but often franchisees own more than one location. I would argue that’s indicative of a pretty successful one because scale and franchising is really important. Are sellers at all willing to sell their franchisees off piecemeal? Or, more often than not, do you got to be able and willing to buy the whole thing or find something else?
Leslie Kuban: [00:34:47] You know, I see both, Mike. I can’t say one or the other is really the more common available opportunity. You know, I saw this a lot of my Mail Boxes Etc. days, that being the owner of multiples required very different skills than owning one. And people may have been very successful in owning one. But then, they get into a whole different ball game trying to lead and manage multiples, and they realize it’s just not for them. They’re not wired for it. So, oftentimes, you will see franchisees sell their second or third business that they’ve tried to start and realize that it’s just more than they can handle if they want to retain their original business, because that’s where they are in their comfort zone. So, I’ve seen that a lot. But if they’re really ready to exit the business, they usually are preferring to sell the whole business, whatever that looks like.
Mike Blake: [00:35:43] I think that’s really interesting because, I think, that’s such an astute observation that warrants spending a bit on it. And it is a different skill set. You know, running a one location shop is a very different skill set, is a very different temperament from managing a system, chiefly, because you cannot be at all your places of business at the same time. And so, it must put much more pressure on your ability to hire well and to put in systems. And, as I like to call it, you know, you have less of an opportunity to outwork your mistakes, basically. It just isn’t enough if you’re going around. Is that kind of where you’re coming from?
Leslie Kuban: [00:36:30] Yeah. And sometimes it’s someone’s comfort zone is being able to see and put their hands on every element of the business. You grow into multiple territories. I mean, you’ve got to hire people to help you. You can’t be in three different places at once. And so, it becomes does one have the comfort and ability to delegate through others and hand over responsibility and control to others. And some people are just not good at that or they’re not comfortable with it.
Mike Blake: [00:37:00] So, you know, price in terms of buying a business is important. The other part of it is where do you come up with the money. And, of course, you know, some businesses are bought where somebody just has cash in their account. They wire and then they own the business. But often they’re financed in some way. Standalone businesses have the luxury or, at least, the option of some sort of seller financing. And that’s a long preamble to the question being this, that, are the financing options different for buying a franchise as opposed to buying a standalone business? And if so, how are they different?
Leslie Kuban: [00:37:40] I haven’t seen them be substantially different, Mike. I think it’s kind of the same scenario of the proper equity injection that the bank would require. Oftentimes, there is some seller financing or an earn out in some form or fashion. I think what might help, though, is if the franchise has a history of successful SBA financing behind it. It actually can hurt or it can help that there’s what’s been termed an SBA registry that franchise brands will be known to be on. And there’s a history there of loan payment or defaults. And so, if it’s a good history, it might expedite the process a little bit. And that whoever the lending sources has some familiarity and comfort with the brand, they still have to be comfortable with the borrower and with the deal. But it might expedite it a little bit. You still have to be a qualified buyer in order to get the financing. And there, oftentimes, is some seller financing. Maybe it’s making up the gap between what the bank is willing to lend, and what the seller wants for the business, and the buyer still wanting to buy that business, even though the bank is only willing to bank it so much.
Mike Blake: [00:39:02] So, franchises almost always have something that they are subject to call a franchise disclosure document or something like that. As I’m buying into an existing franchise, can you talk about where would you start looking in terms of making sure there’s nothing in the document that would be a showstopper for me? What are the key areas that I need to pay attention to or maybe tell my lawyer to pay attention to as I review that document?
Leslie Kuban: [00:39:32] Well, I think the key is having a qualified franchise attorney to review the franchise disclosure document, review the franchise agreement, which may be very different than the franchise agreement and the FDD of the seller. If they’ve been in the business for 10 years or 15 years, the terms in the FDD and the franchise agreement do evolve over time. So, it would be important for the buyer to – and the Federal Trade Commission regulates this. So, it’s really not an issue that the buyer has to obtain and have in their possession for at least 14 days the most current FDD and franchise agreement. And there’s things in there that you want to pay attention to, like the investment.
Leslie Kuban: [00:40:21] But what is reported in the FDD is investment for a new franchise. They’re not typically giving information pertaining to buying an existing franchise other than transfer fees. There’s usually a transfer fee that is involved. The new buyer would be signing a new franchise agreement. They’re not assuming the remaining amount of time on the seller’s franchise agreement. So, I mean, I think that you’re looking for the same things that you would be looking for in a new franchise. But really, the resource is a good franchising attorney than trying to decide for yourself what does or doesn’t make sense.
Mike Blake: [00:40:59] I’m talking with Leslie Kuban of FranNet, and the subject is, Should I buy an existing franchise? So, on the topic of that franchise agreement, is there a possibility that the agreement I’m going to be signing as the buyer may be different from the one that was signed going in? Maybe the terms and limiting conditions have changed. Maybe they’re purely pro forma because of court decisions or new regulations, something like that. But can you assume that the new franchise disclosure – I’m sorry – the new agreement I’m going to sign as a buyer is substantially the same as the one that the seller is operating under? Or, do I look at that very carefully to see if there are any changes?
Leslie Kuban: [00:41:49] Well, it may be very similar. It may be very different. I think there’s a lot of it depends embedded in there. The biggest one being, how long has the selling franchisee owned that business? If they’ve been a franchisee for 20 years, their original franchise agreement is probably different in some form or fashion. And it may be around fees. Franchisors do tend to increase their fees over time. And some of that is just when they’re young, they just don’t know any better. They don’t really know what is required to successfully run and augment their systems. So, they do tend to realize they need to increase their fees over time. So, that’s usually the biggest difference. Sometimes they have changed territory sizes. They may be larger. They may be smaller.
Leslie Kuban: [00:42:47] The selling franchisee agreement, in some ways, is almost irrelevant because the new buyer is going to have to sign a new franchise agreement under the new terms, whatever they are. A franchisor can’t cut some special deal if you get a different royalty rate or you have a different term to the agreement. So, I’m not going to say it’s completely irrelevant, but I don’t know that that’s a source of negotiation with what the original franchisee’s terms were in their agreement.
Mike Blake: [00:43:18] Now, you touched on this but I want to be clear, in your model, you get paid by the franchisor or the seller, I guess, just like a business broker or an investment banker would, right? So, somebody who’s looking to buy a franchise doesn’t owe you a dime under most cases, I guess? And so, I imagine that puts you in a position of kind of sifting through who’s going to kind of make it to the finish line. Because you can’t afford to spend a lot of time on nonbuyers, basically. And so, my question is this, what are the characteristics of somebody that you get to know and it doesn’t make sense for them to buy a franchise? You can see they’re just not wired to be part of a franchise system or something. You know, when is somebody kind of not ready and maybe they should consider going back to looking at a conventional business instead?
Leslie Kuban: [00:44:15] So, if the question is an existing franchise versus an independent existing business, I think the answer is, you know what, you’re a part of a franchise. You do have to comply with some things. You can’t just go off and do whatever you want. When I had my Mail Boxes Etc., I couldn’t just decide to sell pizza out of my franchise. You know, the training and the systems and the protocols, I kind of liken them to guardrails that helps someone learn and run that new business, that helps them prevent themselves from making fatal mistakes. But it also kind of hold you in to something.
Leslie Kuban: [00:44:57] So, you have to be comfortable with the fact that you do have to kind of toe the party line on some things and you can’t just go out and do everything you want. And so, I think the person who is wired for that, they air on the side of, “I like the security and the safety of having something that have some systems to it, and I’m willing to forgo some individual freedoms.” But there are, too, people who are just too entrepreneurial and would never work well in any franchise system. So, that’s part of it. And I think someone who’s a true lone wolf, you know, they may not like the fact that you’re involved with other franchisees in the same market. You are swimming in the same swimming pool. And people who view that as competitive versus collaborative, you know, may be better off going the independent route than the franchise route.
Mike Blake: [00:45:56] Leslie, this has been a terrific conversation. There are other questions that we could cover, but we don’t have the time to do that. If people have questions about buying into a franchise, can they contact you? And if so, what’s the best way for them to do that?
Leslie Kuban: [00:46:09] I would love for them to contact me. I’m on LinkedIn, so that’s always a great place to hook up. But my number is 404-236-9115. And my website is FranNet, F-R-A-N-N-E-T, .com.
Mike Blake: [00:46:28] That’s going to wrap it up for today’s program. I’d like to thank Leslie Kuban so much for joining us and sharing her expertise with us. We’ll be exploring a new topic each week, so please tune in so that when you’re faced with your next executive decision, you have clear vision when making it. If you enjoy these podcasts, please consider leaving a review at your favorite podcast aggregator. It helps people find us that we can help them. Once again, this is Mike Blake. Our sponsor is Brady Ware & Company. And this has been the Decision Vision podcast.
