CAUTION WARRANTED WITH NEW BUSINESS PURCHASES

By Frances McGuckin

It seems to be the season for people purchasing businesses and franchises, with many calls from excited entrepreneurs-to-be chomping at the bit to become self-employed. After talking to many lately, it is worrisome to see the potentially dangerous mistakes that could cause both financial and emotional hardship.

Everyone is out there to make a fast buck, particularly the person with a business or franchise for sale. Without exception, these brilliant businesses are presented in the most positive light by enthusiastic vendors who have "made their profits from the business and are ready to move on to something else", or, who have the greatest money-making franchise since the invention of the wheel and sliced bread combined.

Beware purchasers, beware. No matter how honest or sincere the vendor appears, approach these ventures with caution and use professionals to help you through the decision-making process. You need to use a corporate lawyer conversant with franchise agreements to review these long-winded and carefully-worded agreements. Remember that by owning a franchise, you are tied to a stringent set of rules, regulations, advertising and purchasing restrictions that will completely limit your entrepreneurial spirit.

Once signed, the agreements are difficult to get out of, and many new franchises do not have a proven track record. Financial figures are often projected and there is not enough history to the business for an accountant to thoroughly review the figures and make informed decisions about its viability. If possible, find someone who has recently owned a business in that industry and sit down and have a good long talk to them. Ultimately, you need to know who is making more money out of this deal, the franchiser or the franchisee.

If you are considering purchasing an existing business, you need financial figures for the past three years and right up-to-date that have been prepared by a credible accounting company. When you purchase a business, you are purchasing four things: the assets and leasehold improvements, the inventory, the goodwill, and a job for yourself.

Be acutely wary of vendors who present financial figures prepared by themselves. If they do not have a full financial statement available and just present a statement of income and expenses, ask for a copy of their tax return and the front jacket showing the net business income. By delving into this information, you may find some cover-ups and important financial surprises. Always use an accountant to help you through this accounting sleuthing maze of figures-it will save you money and heartaches.

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