Red Flags When Investing in a Franchise

Swing Doors

When looking into investing in a franchise, there are many things you look for to make it a fit for you.  You want it to be something of which you are interested and that you will enjoy, as well as profitable.  While most people have no problem knowing what they want, they sometimes get excited and overlook red flags they should address in their decision to buy.  Although some red flags can be simple to correct, many are not and should be a signal to walk away.

If you are investing in a for-profit franchise business, it should be showing a profit.  The financial statements and income tax returns should mirror each other; and, if they don’t, that is a huge red flag.  Sometimes the bookkeeper of the business, which may be the owner of a small business, prepares a quarterly P & L (Profit and Loss Statement) and hires an accountant to prepare the income tax returns at the end of the fiscal year. There is some good accounting software that is easy to follow and from which to print P & Ls.  However, most businesses prefer to have a CPA prepare their P & L Statements quarterly and their income tax at the end of the fiscal year.

When you purchase a franchise business, the inventory is included in the purchase price.  That factor can change up or down after the final inventory is counted just before closing.  The red flag for inventory is long before that point.  Sometimes owners carry an inventory that is too large and have too much money invested in it.  Also, make sure you are not purchasing old inventory that will never sell.  Your proximity to the suppliers and the length of time required to transport are two important factors.  Also, a business that is not clean and is cluttered may have lots of things that need to be thrown out and not purchased by you, the buyer.  Be sure to look at the equipment to determine if it is working and how much longer it will likely work before needing to be replaced.

If you’re considering starting a franchise in windows and doors, reach out to us at Shield BP today!