SEARCH TACTICS

Having decided on your search criteria, covering such matters as industry, location, size, price range and any particular characteristics you are seeking, you now need to find businesses to buy which meet these criteria. And this means planning and conducting a search for these businesses.

I say businesses, as until you have completed the deal you need to be continuing to search the market for prospective targets.

If you’re finding very few opportunities to buy, the danger is that you may become desperate and buy something that is not ideal, simply because it is available. The secret to finding a good deal can often be in simply generating a strong ‘deal flow’ of potential targets to look at so that you have a good choice. In fact some advisers would argue that the biggest problem facing any individual looking to buy a commercial business is uncovering the opportunity, not actually doing the deal.

To generate opportunities on a regular basis you need to have a prospecting machine in action day in, day out, based on the ‘sales funnel’ principle:

In the same way, you need to have a prospecting programme that generates:

• companies to look at
• that pass your desktop screening
• who will talk to you when you approach them
• who will consider an offer
• and agree a price
• where you can complete due diligence; and
• complete a purchase.

Keeping your options open

While you should focus your search around your target criteria, and should pursue discussions with any particular target of interest as vigorously as possible, you should always aim to be in discussion with, or have offers out, with more than one business throughout your search. This means that if your discussions with your current target fall through you can quickly be picking up discussions with the next rather than having to restart your search process from scratch.

While you need to be enthusiastic about any business you’re intending to buy (otherwise what’s the point?), it’s also important not to become emotionally attached to any one particular target (unless and until you have bought the business) as if you do so you may end up overpaying. Having a search programme continually generating alternative targets helps you to keep the business you’re looking at in perspective.

Becoming over-committed to the current target also means that you are likely to let your search programme drift and reduce the number of alternatives to be looked at. This will in turn mean that if the deal does fall through you’re likely to take some time in getting your search programme back up and running.

In setting up your search approach you have a number of important questions and choices as to how you go about it which will be discussed in the rest of this chapter. These include considering whether you will:

• search for businesses for sale, businesses that aren’t for sale, or both
• conduct your own search or retain advisers to search for you, or both
• explore franchising as an alternative.

BUSINESSES FOR SALE AND NOT FOR SALE

It may sound simplistic but the types of business that you want to buy will fall into one of two camps.

Businesses for sale

Some businesses will formally be up for sale. The advantages of dealing with a business where the owners are actually trying to sell it are obvious in that:

• they are generally easier for you to identify (although with some exceptions as discussed below) and easier to approach
• you can have a reasonable expectation that the owners are serious about selling and are therefore worth talking to.

The disadvantages, however, are also obvious in that if the owners are actively marketing the business for sale either themselves or through brokers or a corporate finance house, then many other prospective purchasers will also be aware that it is on the market. You may therefore face more competition to buy the business which can be expected to drive up the price that you have to pay and increase the uncertainty about whether you will in fact complete the deal.

The business is also likely to have gone through a grooming process with a view to enhancing its apparent value. Again this may increase the price being sought for the business, but it may also work partly in your interests in that the preparation for due diligence should have ensured that as many as possible of the potential snags and risks in the business have been dealt with in preparation for a sale.

Businesses not for sale

Many businesses that you might be interested in are not currently up for sale. Amongst these businesses there will, however, be some where the owners may be willing to consider selling if approached correctly.

The art of successfully buying businesses that are not currently for sale often lies in:

• the ability to identify owners whose circumstances mean that they might be minded to sell if they receive the right approach, even if they may not actively have thought about doing so
• constructing an approach that is likely to be of interest.

Therefore, ensuring that you understand the potential motivations of different types of owners can be vital to success in this area.

FINDING BUSINESSES THAT ARE FORMALLY FOR SALE

You might expect that a business being sold will be advertised to attract buyers and should therefore be relatively easy to find. However, surprisingly, this may not always be the case.

• some advertising of businesses for sale will not be ‘public’, but will be through private networks
• some businesses for sale are not actively advertised at all!

Public advertising

Sellers who want to publicly advertise their business for sale will do so by way of adverts in the relevant press. The definition of what counts as the relevant press will obviously depend upon the nature of the business and its size.

A small business such as a post office or shop is likely to be advertised by either its owners or a brokerage or estate agent in:

• the local press
• national publications such as Dalton’s Weekly or Exchange and Mart
• a property catalogue produced by the agents; as well as possibly
• a trade magazine.

The more specialist the trade, the less appropriate is general ‘non-business’ press and the more the focus will be on trade and specialist press. So a professional business such as an accountancy firm for example is likely to take out an advert in the specialist accountancy press, such as Accountancy Age.

Businesses of a reasonable scale which are looking for a significant sale value will tend to advertise the sale in the national financial press, such as the Financial Times, which runs a weekly businesses for sale page, or the Sunday Times and Sunday Telegraph.

Businesses may put the advert in themselves, in which case they will usually give somewhat sketchy details and take advantage of the box number service that most newspapers operate in order to maintain confidentiality. Alternatively brokers or corporate finance sales advisers will place adverts on their behalf and act as the point of contact for purchasers.

Such brokers and the corporate finance departments of accountancy firms may also list businesses they have for sale on their website.

Adverts placed by insolvency practitioners

Insolvency practitioners (IPs) who are appointed to a business where there is some prospect of selling it as a going concern will generally also rapidly place adverts in the specialist trade press and the Financial Times’ businesses for sale section, giving details of the business that are available.

A quick tip about these adverts from a number of years experience in drafting them is that if they list a ‘high-quality and well-trained workforce’ as one of the business’s key features, this means that the IP’s staff could not identify or think of other real attractions or assets to include in the advert and have slipped this in to use up the space!

Also bear in mind that the IP’s advertisement may only be appearing less than a week after their appointment and in the interim the IP:

• will have actively circulated any parties that the management have identified as potentially interested in the business in the days immediately after the IP’s appointment
• may also have undertaken a short pre-insolvency sales process in anticipation of being appointed, resulting in the ability to complete a pre-arranged sale almost immediately after their appointment (a ‘pre-pack’, see below).

The IP may therefore be well advanced in their discussions with potential purchasers by the time you’re reading the advert and requesting a sales pack.

Specialist brokers

In addition some specialist types of business broker, such as Fleuretts for the pub trade, who have a regular volume of property-based businesses to sell, produce a regular catalogue which is freely available to potential buyers. This gives a picture of the property and outline details in much the same way as estate agents will sometimes produce a free property paper as well as placing details of houses for sale in the local press.

Private advertising and networks

The market for many businesses is, however, relatively inefficient as there is often a need to keep the fact that a business is for sale confidential. This is because knowledge that it is on the market can have a significant adverse impact upon the business due to the uncertainty that this generates amongst customers about future service and employees about future prospects, not helped by active poaching of customers and staff by competitors looking to take advantage of the situation.

So some sellers will want to find a buyer for their business, without having it publicly advertised.

Business brokers therefore operate what are in effect private mailing lists, through which businesses are advertised for sale without all the exposure that a public advertisement will bring. A number of corporate finance houses, specialist brokers and even legal practices offer a business sales service which includes this type of marketing.

Generally brief details giving no more than a headline description of the business sector, a paragraph of description and a reference number for obtaining further information will be included in the listing. This will then be circulated either by post or in a regular email listing or newsletter to potential interested parties, as well as being listed on the broker’s website.

By simply identifying brokers from advertisements they place regarding businesses for sale and contacting them to express an interest you may have yourself put on their mailing list. You should then start to receive these private circulations on a regular basis. As with public adverts, however, you will be in competition to buy a business with many other people who are receiving the same newsletter.

Business angels networks

Similarly businesses that are only looking for investors rather than necessarily a complete sale are likely to register their details with a business angels network. Again most such networks operate by circulating details of potential opportunities to their investor members.

These sort of investment listings will not normally be from people looking to sell the whole of their business. Instead they will normally be seeking finance from a business angel (a wealthy individual, often a retired businessperson who has already sold one business and who is interested in investing funds personally in smaller or start-up businesses, and who often will want to take an active role in the company’s management) with which to develop or grow the business in return for a stake in it.

Many business angel networks cover a particular locality since in practice most business angels tend to want to invest close to where they live so as to be able to keep an eye on, or to facilitate being actively involved with, their investment. There is a national business angels network, www.bestmatch.co.uk, through which you can find a list of local business angels networks as well as details of their joining costs and the investor criteria each requires to be accepted onto their list. The British Venture Capital Association (BVCA) website, www.BVCA.co.uk, also has a downloadable document on business angels with a very comprehensive list of networks which you might wish to join.

Joining can, however, be a problem as a result of the Financial Promotions Order which restricts the ability of intermediaries to forward details of investments to potential investors who meet certain criteria (as discussed in more detail on p111 below). If you’re not able to meet these criteria it may be difficult if not impossible to find a business angels network you can join.

Personal networking

You should also network with intermediaries such as your personal contacts and professional advisers, including accountants and bankers, since they may become aware of owners who are considering selling. To do so you should:

• set up an active marketing programme of regular contacts with these professionals
• put together and distribute a description of the type of business you’re interested in and your criteria taken from your acquisition plan, as this is where your personal sales pack becomes vital in convincing intermediaries that you are a serious potential buyer who will not be wasting their contact’s time
• provide some information about your financial backing and capacity to undertake a purchase
• say thank you to any intermediary for any lead and actively and quickly follow up any leads generated from such intermediaries to show that you’re serious.

You should always contact the intermediary to give them feedback as to how you got on with any lead. Not only is this a matter of simple politeness but:

• it’s also a way of demonstrating your seriousness
• it’s another chance to contact them and keep your interest live in their mind
• it can allow you to correct or refine their understanding of what it is you’re looking for
• do not forget a lead that an intermediary has given you is one of their own contacts and the intermediary will be concerned from their own point of view to ensure that this contact has been dealt with appropriately.

Turnaround opportunities

If you are specifically interested in finding turnaround opportunities you should register with the Turnaround Equity Finder service at www.turnaroundequity.co.uk. This is a specialist introductory network which is free to investors and is focused on matching investors interested in buying into turnarounds with companies in some form of distress which are seeking equity investors or business sales.

Placed sales

The above types of approach shade off into sources of businesses which are being sold by being actively marketed to parties identified as likely to be interested in buying them (‘placed’), rather than being publicly advertised.

In the most basic version of this activity, some brokers and business angels networks do not simply act as passive circulators of all opportunities registered with them to all investors on their database. Instead they will actively seek to match businesses for sale with the interests of those investors registered with them, who have a specific interest in a particular type of business sector or size.

This approach is then taken a stage further in a traditional corporate finance sales process. In this case the corporate finance department of an accountancy firm receives a ‘mandate’ from a business’s owners to sell it. The firm will then typically assist the owners to groom the business for sale before then conducting a specific marketing exercise designed to place the business in front of likely purchasers. This involves them in identifying potential buyers both from within the company’s own sector and outside, who are considered to be likely to have an appetite for the deal. The corporate finance firm will then send a speculative sales letter to the identified company or individual to see whether they have an interest in buying the business.

The obvious advantages to you of receiving such a letter are that:

• you are being approached by a business that is serious about selling to the extent that they have instructed accountants to act on their behalf, for which they will normally have had to pay an upfront ‘commitment fee’ when engaging them to conduct the work
• the business may well not be publicly advertised so the number of potential competing parties may be relatively small.

Against this, however, if the seller’s lead adviser is any good at their job you must expect the opportunity to be put in front of people who are seriously interested. The competition to buy the business may therefore be more serious in comparison with the number of ‘tyre kickers’ generated from public adverts, even if smaller in number.

Pre-packs

This type of placing approach has traditionally been used by corporate finance firms seeking to sell good businesses with good prospects. Increasingly, however, it is also being used to arrange what are known as pre-packs.

A pre-pack is a pre-packaged insolvency, where prior to a receiver or administrator being appointed, arrangements have already been put in place to find a buyer for the business with the finance to conclude the deal, so that the insolvency practitioner (IP) is able to sell the business immediately after appointment. The advantage of this to the IP, their appointer and the business is that it removes much of the uncertainty as to likely outcome.

Under a traditional appointment of an IP as administrative receiver or administrator the IP would have to come in, take control of the business, decide whether it is appropriate to try to trade it on, and arrange to do so; while at the same time attempting to put together a sales pack, advertise the business to generate offers and seek to negotiate a sale on the best terms possible. In the meantime, the value of the business may be suffering significantly as a result of the stigma and adverse impacts of trading during an insolvency, such as the departure of key staff or defection of clients worried about continuity of supply.

In contrast, in a pre-pack:

• the advisers may have more time to sell the business, depending on the degree of crisis in the business, than they would have once the business has gone into a formal insolvency; and buyers will have more time to put financing in place, so facilitating the obtaining of a better price. The advisers can also concentrate fully on the attempt to sell the business since they are not having to deal with taking over and attempting to trade or restructure the insolvent business at the same time
• the business does not have to trade during a period of formal insolvency, other than say a day or two in order to allow the sale to take place, and therefore the adverse impact of a period of insolvency on the business is minimised
• as a result, the appointer knows exactly what the financial outcome of the sale is going to be and therefore has relative certainty as to the deficit they may suffer, whereas without a pre-pack this is always uncertain until the sale is concluded.

Accelerated corporate finance transaction

An accelerated corporate finance transaction is when this type of sale process has been conducted in a short time scale with a view to complete a disposal for the maximum value prior to an insolvency.

Contacting lead advisers

In order to have such leads sent to you, you will need to convince appropriate lead advisers that it is worthwhile sending them to you. This will involve you in undertaking the same sort of marketing programme to lead advisers as outlined in respect of intermediaries above.

Brokers and lead advisers are really two points along a continuum between a high-volume marketing focused exercise offered by most brokers through to a low volume, high value-added bespoke advisory and deal support service provided by lead advisers; and there are obviously brokers and advisers at many points along this line. As a potential buyer you will generally find that it is easy to get on the books of a brokerage firm and to generate a flow of information about the volume of businesses which are on their books, although this is unlikely to be tailored to your requirements. In contrast you may find it is difficult to generate specific placed leads from corporate finance lead advisers for a number of reasons:

• As a bespoke service they tend to be dealing with much smaller numbers of businesses for sale which they try specifically to place with contacts who they know may be interested. The chances that any particular lead adviser will be selling the precise type of business you are interested in is therefore low.
• Lead advisers tend to focus their marketing and contacts upon potential groups of buyers such as large corporates, venture capital houses or business angels networks with whom they may deal many times to sell many businesses. Their appetite for forming a one-off relationship with you as an individual on the off-chance that you might be a buyer for one of their businesses (when you will undoubtedly be talking to many other people) is likely to be limited.
• Many lead adviser firms offer a retained search service for buyers in which they actively seek opportunities. So if they have such retained clients on their books who are paying for this service, why would they give you a good lead for free?

As a result, while it is worth registering your interest with lead advisers, you should be realistic about the chances that they will contact you with an ideal opportunity.

An alternative approach is to network yourself into a venture capital house, as these will be known to all of the relevant lead advisers who will look to place appropriate opportunities with them. If you speak to venture capitalists they will almost without exception say that they don’t back the businesses when buying, they back the people. So if you can convince a venture capital house that you’re a good person to become involved in an MBI in a particular industry, they may find the opportunity for you and of course this will mean that you will already be well-placed to finance the deal.

Essential points

In summary, therefore, to maximise your chances of finding a business that is for sale which may be of interest you have to:

• look at the publicly available sources of adverts of businesses for sale
• ensure that you get yourself onto the lists and networks whereby you can be circulated with details of companies for sale, which are not being publicly advertised, which is often simply a case of registering your interest with the brokers and business angels networks
• actively manage your networking so that intermediaries know of your interest
• finally actively market yourself to the corporate finance lead advisers who are managing corporate finance style placings, so that you will be circulated with opportunities that match your requirements, and to venture capitalists who may be looking to put together a team to conduct an MBI.

FINANCIAL PROMOTION

Sending out details of a business that is for sale is an activity that counts as a financial promotion and is regulated by the Financial Services Authority (FSA) under the Financial Services and Markets Act 2000 (FSMA) and the Financial Promotions Order (FPO). The FPO is designed to prevent unsuitable investments being inappropriately sold to unsophisticated investors. All individuals and businesses involved with undertaking financial promotions must be authorised by the FSA and subject to their regulation and oversight.

Many accountants and other professionals prefer not to be regulated by the FSA. Instead, they will seek to be authorised by their own professional body (such as the Institute of Chartered Accountants in England and Wales, ICAEW), which is known as a designated professional body (DPB). Once authorised by a DPB a firm must state on the bottom of its letterhead that it is authorised by its DPB to conduct a range of investment business activities. It is then able to conduct a limited degree of financial promotion, so long as this falls under certain regulations given in the FPO, the most important of which are:

• There is no ban on sending out details where a controlling interest (over 50%) or the whole of the business is for sale.
• Under Article 55 and 55a, information about investments of under 50% can be sent to people who are already clients of a firm, where this is an ‘incidental part’ of the overall professional services that they have been engaged to provide. So your own accountant could send you this type of information so long as this is not the main work that they are doing for you.
• Under Article 48, communications about this sort of investment to ‘high net worth individuals’ are exempt. This is designed to allow proposals to be sent to business angels and other sources of informal capital for start-up and small companies. This exemption can only be used where an individual has filed a certificate with the intermediary that has been issued by their accountant or employer to show that they have the appropriate net worth and which states that they are eligible to receive these types of promotions.
• To be a high net worth individual under this exemption, the statement must show that you have had an annual income of at least £100,000 in the preceding financial year, or have held net assets of not less than £250,000 throughout it. Since the certificate is based on your prior year’s financial position it must therefore be renewed on an annual basis.
• Under Article 53, communications to sophisticated investors of this type are also exempt. Again, the investor requires a certificate, although in this case, it is not subject to any minimum solvency requirements. However, only a firm authorised by the FSA can provide an individual with a certificate which states that the person has enough knowledge to be able to understand the risks associated with the investment and shows the types of investment in respect of which the individual can receive information. These certificates are valid for a period of three years.

To register with many of the business angels networks which may involve investors taking minority stakes in businesses, you may need to obtain certification as a high net worth individual or sophisticated investor.

FINDING BUSINESSES THAT ARE NOT FOR SALE

Finding businesses that are not for sale is a matter of conducting a search for businesses that meet your overall criteria that you can then approach with a view to persuading the owner to sell. You can therefore either conduct your own search or retain professional advisers to do it for you, usually as part of their overall remit to act as your advisers throughout the rest of the purchase process.

Do-it-yourself search

To conduct your own search you need to identify sources of information with which to identify businesses.

Online databases

The first port of call is likely to be public websites such as www.yell.co.uk. This is the Yellow Pages website on which you can search by location and business type based on Yellow Pages classifications. Personally I find these classifications more useful for searches than the Standard Industry Classification codes (SIC codes) used by Companies House (www.companieshouse.gov.uk) as they are more descriptive of what businesses actually do.

If you are looking for a widget manufacturer this will come under widgets in the Yellow Pages, while its SIC code might be ‘2924 Manufacture of other general machinery’. That is assuming that all widget manufacturers classify themselves here and not as for example ‘2875 Manufacture of other fabricated metal products’ or any of the other categories. In addition, each of these categories is likely to include large numbers of manufacturers of thingamajigs, gizmos and other products that you are not interested in.

Yell.co.uk used to provide a business service whereby you could download lists of business classifications by county together with a limited amount of financial information where this was available. Unfortunately they have ceased to offer this service and instead this type of inquiry is referred across to Experian (see below).

Nevertheless by conducting ‘normal’ searches on Yell and consolidating the results onto a spreadsheet you can quickly build up a list of businesses of the type and location you are interested in as the starting point for your research, even if you then have to find the financial information elsewhere.

In addition to Yell there are a number of business data companies which can be accessed through the internet, such as Experian (www.experian.com). These generally provide the facility to conduct searches by SIC code and location and will provide results giving basic details such as the address, telephone number, turnover and number of employees where this information is available.

Another online company, www.192.com, sells a CD-ROM (UK Info Business) covering 2.5 million registered UK companies with financial information on approximately 1 million of them, together with data on 5.5 million directors, while www.cd-rom-directories.co.uk sells a variety of databases on CD-ROM.

Do not expect to be able to rely on turnover information given by any company database, as this is likely to be highly incomplete. Many small to medium-size companies are exempt from the reporting rules which require the inclusion of turnover figures in the accounts filed at Companies House from which these databases are compiled. You will therefore find that many companies listed will apparently have zero turnover. However you will also find that in many cases the databases also contain information on the number of employees which can help you to judge the size of business in the absence of a turnover figure.

Trade associations

The second key source for your search is from identifying trade associations, many of which will have a website which allows you to identify members, or will produce a directory of members that you may be able to obtain.

You should subscribe to the trade press to see which businesses are active and attend trade shows where you can obtain a list of exhibitors and see their products.

Accountants’ business databases

Your accountant may well own a business database for their own marketing which could be used to generate you a list of targets.

However you are likely to find that your accountant is reluctant or is simply unable to undertake such a search for you. This is because they will not have compiled the data themselves but will be subscribers to databases provided either direct by the large database companies, or which are provided tailored to specific needs by intermediary companies who themselves will buy the basic data from these large suppliers.

The use that the accountants can make of this data will be strictly controlled by their licence agreement and as the producers of the original data have an interest in selling this information directly to users, the licence will normally prohibit users from providing raw data to a third party.

Once you have your basic list of companies you then need to start to compile more data in order to screen these down to the candidates that meet your criteria.

Retained search

The alternative to undertaking a search yourself is to retain advisers to do it for you as part of their overall engagement. These advisers will often have access to databases with useful company information such as:

• directors’ ages so that they can target businesses where directors are over 55 and may therefore be interested in retiring
• benchmarking and financial health information which can allow you to target the best performing businesses in the industry (or the worst if you’re seeking a turnaround opportunity).

Such advisers will normally seek a retainer fee either as a one-off payment or on an ongoing basis throughout the search, which is normally treated as an advance against the overall success fee.

This is not simply to cover costs, although the time taken to find a business can be lengthy and advisers may therefore be keen to structure their fees so as to cover costs as they go rather than having to wait a lengthy period before being paid a significant success fee. As importantly, however, intermediaries will be seeking a sign of commitment from you the purchaser so that they are not wasting their time, as the bulk of their reward will come from some kind of contingent success fee, which of course in some cases may never actually come through.

If you are looking for an adviser to carry out such a search it might be worthwhile attempting to find an industry specialist who will be best placed to uncover opportunities in the sector you are interested in because they will have an extensive network in that industry.

If working with such an adviser, be careful to establish the contractual basis at the outset and make sure that the engagement letter covers:

• whether the retainer will be deducted from the success fee in whole or in part
• how long the agreement will last for and what happens when it is terminated (so for example, is a success fee still due if you buy a business identified by the adviser, after the expiry of the agreement?)
• is the agreement exclusive (so for example, will you have to pay them a success fee if you find a business to buy on your own?).

MBO SPECIFIC ISSUES

If you are contemplating an MBO of your existing business then there is obviously little issue when it comes to finding the business for sale. If you are a director or senior employee of the business there are, however, serious issues concerning the very real conflict of interest that you may be creating in attempting to undertake an MBO that will need to be addressed.

Your first step should be to approach the company’s board and notify them of your interest. If you don’t you may well be breaching your employment contract and/or your fiduciary duties as a director if you:

• disclose confidential company information to potential backers; or
• involve other members of staff in your project.

And of course there may be issues concerning how you vote at board meetings on issues that might affect your MBO plans.

The board will have a duty to act in the interests of the company and its shareholders and should not therefore reject any bona fide offer outright without considering it and consulting, if necessary, with the shareholders.

If the board is willing to consider your offer they will generally:

• form a board committee of directors not involved in the MBO to consider any offer through to negotiating heads of terms and may engage professional advisers to help them
• agree with you how you will act during the MBO process including how much information you are able to provide to financial backers, how much time you can spend on the MBO and whether you should relinquish some of your existing duties.

Whilst MBO teams sometimes ask, you should not generally expect that the company will underwrite any of your professional fees in undertaking an MBO, not least because this can throw up issues of potential ‘financial assistance’. Additionally the consent of the shareholders is required in respect of any sale of substantial assets to a director (see Chapter 10).

FRANCHISING

As an alternative to buying an existing business or setting up a completely new business from scratch, you could consider buying a franchise. This is really a specialist area and there are a number of books devoted to how to do so successfully.

An initial attraction in comparison with the process described so far in this chapter is that there are many franchise opportunities readily available for purchase which are actively being marketed, as a swift look at publications such as Dalton’s Weekly will demonstrate.

The advantages of franchising are that it should provide:

• a proven business model
• often with ongoing business management support to help you run the business
• in some cases financing packages which have already been arranged to support buyers.

Points to consider

The issues and disadvantages involved in buying a franchise can be:

• Are you really buying a successful business model, or is the model simply successful for the people selling the franchise? The franchisor will usually take a significant upfront payment from you and others for the franchises being sold, so you should ask how committed they are to the future success of your business. It is noticeable that many of the adverts for franchises are of a very ‘hard sell’ nature, promising reliable good earnings for a limited amount of cash down now. While there are undoubtedly very successful franchise organisations which provide good opportunities for franchise holders to build a successful business, some of these adverts bring to mind that old saying which is very applicable in business: if something looks too good to be true, it probably is.
• Is the geographical area for which you are buying your franchise likely to provide a suitable level of business for this product or service? In some cases franchisors may well have already taken the prime territories for themselves and are simply franchising the less attractive ones.
• Are you committing to paying a significant level of your turnover to the franchisor into the future, either directly as an ongoing charge or commission, or indirectly as a result of having to buy certain material or supplies from the franchisor (at their markup)?
• Will there be any restrictions on your ability to sell your franchise on later should you make success of it? If so this will restrict your ability to create a business with a realisable capital value.

You therefore need to investigate the viability of any franchise opportunity very carefully. Remember that even if the business model you are buying is a very successful one, in your area what you are actually buying is simply the right to launch a start-up business, one of the riskiest things you can do.

In practice you should therefore think of buying a franchise not in terms of buying a business, but simply as a way of attempting to reduce your risks in starting up a new business.