Franchise Investment Due Diligence In Hard Times

We are not now in NORMAL times. How does this fact affect risk assessment in franchise investment due diligence?

The impact is extreme. The investment risk has become exponentialized to the point at which prudence dictates that investment decisions in any small business – franchised or otherwise – simply be put on hold. That’s right. Don’t sign any franchise agreement right now. Don’t lease any commercial property for the purpose of starting a small business. Don’t borrow any money for franchise investment.

There may be some extreme situation in which you feel compelled to act now. That situation would have to be such an incredible grand slam match for you and for your financial capabilities that you would find it very hard to believe it is even available. If it seems that good, it probably isn’t. But whatever you were going to consider by way of due diligence on such an incredible appearing opportunity, that due diligence has to be escalated by orders of magnitude.

Why is this an emergency situation with particular regard for franchise investments?

Because of the most incredible mismanagement of policies, everything that relates to the prospect of small business financial success has changed enormously for the worse within the last eighteen months.

What is being considered and implemented to deal with “gas prices” has so impacted food prices, in addition to identifiable international demand trends in food scarcity, that any business that deals in providing food service is risky beyond the possibility of reasonable consideration at this time.

Food franchisors control their franchisees’ purchasing in a manner that makes the food cost in any food business start up detrimentally non competitive, even before the run up in food prices that we are experiencing. What is being done to deal with that problem is to instruct food business franchisees to reduce portions and reduce the quality level/grade of the food that is being sold. This is supposed to facilitate lowering of prices to accommodate the fact that there is so much less money available for people to spend at any food service business right now.

Food franchises were only marginal two years ago because of the price gouging associated with non competitive purchasing requirements. Now the likelihood that you could make an investment in a food franchise start up and achieve profitability within any reasonable time period is so remote that a decision to invest in a food franchise is now imprudent beyond measure.

Financial disruption in American families is causing everyone with even a little bit of good sense to reduce discretionary spending to the lowest possible tolerable level. Don’t spend money on anything that has to be made by a business and served to you/delivered to you. Eat at home. Prepare your own food at home.

Moving away from the food business, any service business that depends for its prospects for success upon the effective impact of brand recognition is simply delusional. The big brand franchised businesses are all – yes all – so saturated and overpopulated now that they are resorting to drastic price competition in an attempt to survive this crisis. In recession/depression trending economic circumstances, brand names mean nothing. Investing in a start up small business that depends upon brand name differentiation for its success is sheer madness at this time.

Information on success/failure rates over the past two years in any franchise system is useless, because the rate of negative change now has the glide path of a brick. You can now buy any of hundreds of franchised small businesses that are failing to succeed and are up for resale at distress prices. The people who bought them during the last five years are failing in droves. A new and inexperienced operator has no chance that is worth taking to achieve break even. Even if you have an extremely deep pocket, what might have taken two years to hit break even a few years ago will now require four years, even if the current adverse trends immediately start reversing.

The mismanagement of immigration policy makes any business that depends upon the availability of reliable cheap labor greatly less likely to have a chance to hit break even. Small retailers are now regularly raided by INS agents. Their employees are frequently found to have defective credentials, no matter how careful the business owner has been about this issue, and routinely handcuffed and frog marched out the door into waiting arrest vans. You can’t replace half your work force in just a week or so. You are just out of luck.

The most obvious signal that the sale of franchise business opportunities today is fraught with epidemic fraud about prospects for success is that franchise disclosure documents have not changed to disclose the steepness of the risk slope that has just occurred in the last year and a half. Neither have the sales and marketing brochures used by franchising companies to convince prospects to buy their franchises. They are saying the same thing despite the enormous negative changes in the risk of failure.

The only franchises that have any potential to provide investment success are super concepts that are relatively new and that are being offered only to investors who already have successful track records in financial operations of networks of other franchised businesses – not one at a time franchise offerings touted to people who have not previously been small business owners. These are few and far between, and not available to you if you are just coming out of some company employment milieu and looking to “own you own business”.

Your chances for franchise business investment success are so reduced now that you really need to find any way you can to delay putting a franchise investment in your financial future. The odds are extremely against success right now.

No matter what presidential candidates say they will do if elected, even if it were possible, it wouldn’t be available to positively affect your prospects for at least three years – 2011. Consider also that what the candidates promise simply cannot be done by presidential mandate. Vast legislative processes have to take place over at least a few years, only then to be tested in litigation about whether they are lawful anyway. It is all just smoke. There will be no short term cure. In addition, we will continue to waste $ 120 billion a year in Iraq and Afghanistan, just on infrastructure investment that they can pay themselves from their own oil and opium revenue. That much money could be put to good use here, but it won’t be for a long time. You can’t count on it.

I could go on and on about other reasons to defer any decision to invest in any franchised business at this time. Franchise investment misrepresentation was rampant before these extreme economic negatives began to take effect. It has not changed. The conditions make the representations even less reliable than they previously were.

Anyone who tells you that it might be wise to buy a franchise now simply does not know what he is talking about.

If you are now considering such an investment and have been working on your business plan, go back and increase all the cost factors by an additional 10 % a year. Reduce your pricing/sales assumptions by another 10 % a year. Now refigure your break even point and working capital requirements, plus your living expenses for at least three years. Where is your likelihood for financial success after you refigure the numbers in this manner? That is your most probable result.

No one in his right mind would invest on these data trends. Current franchisee investment must be deferred for at least a few years. Let the shake out run its course and then you can think about what part of the devastated USA franchise landscape you might wish to consider.

Anyone who advises/urges you to make an affirmative franchise investment decision now is simply out of touch.

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The franchise investment tutorials on www.FranchiseRemedies.com are full of the risk avoidance admonitions that everyone should consider whenever thought is given to buying a franchise. Those were written to deal with what we used to call NORMAL times.