Buying a franchise resale

So you’ve decided that you are going to buy an established business rather than setting up a business from scratch. You are not alone in having this particular thought because more and more people are recognizing that to take over an existing business then develop and build it makes a lot of sense when compared to the risk involved in starting with a new concept or idea. An existing business has cash flow already, customers in place, staff (if appropriate to the business) and a brand presence.

Extending that thought process, it is only natural therefore that people seeking to acquire an existing business should consider an existing franchised business because doing so gives you the best of both worlds; an established business with a current cash flow etc to build upon and the security of operating a business where the success rates of franchising are well known to be higher than independent operations.

Most franchisors will have franchisees within their network who have decided they want to put their business on the market and sell. Some franchisors won’t openly advertise the locations that are for sale because most of their franchisees wouldn’t like it to be general knowledge they are thinking of moving on. They will however discuss them with you, confidentially, once you have passed the franchisor’s initial approval stage. You can then decide whether to opt for a new location or to take over one of their existing franchises.

Within the franchise industry business sales or transfers are known as “Resales”. This is because a franchisor has sold the location/territory initially and now the licence to operate in that location/territory is being sold-on to a new franchisee, hence the term “franchise resale”. In some more mature networks a specific location may be re-sold several times over as the various owners of that business have decided to capitalise on their investment and hard work by selling the business on to new owners.

Why existing franchises are for sale

One out of every twelve businesses in the US is a franchise operation; with a new franchise business being opened every 8 minutes of each business day.

These figures alone show the enormity of the US franchise market, and because of this the resale of franchise businesses is also huge.

A franchise resale may be a good option if you find the thought of building up a new franchise from scratch a little bit daunting, but expect to pay a premium for buying an existing franchise – sometimes as much as 30%.

There are, however, added advantages to paying a premium. As well as the traditional benefits of franchising, including the training, support and use of a proven business format, when purchasing a franchise resale you are able to take advantage of actual trading accounts and of course an existing client base, making your future a little easier to predict.

An established franchise business will be able to provide some actual performance figures, together with any management figures produced. You should be able to verify these figures with the franchisor, and also seek advice from an accountant as to whether the sale price represents value for money.

If the franchisee has any staff it may be useful to ask them what they think of the business. And why not also conduct some of your research through the existing client base – are the customers happy, can you retain them once you have taken over, how can you enhance the customer experience in the future and are there more customers out there?

Pay some attention to the existing franchisee’s relationship with their customers and if there appears to be little loyalty be aware that you may have to rebuild confidence and equate this to the premium that you may have to pay. Conversely, if you find that the existing franchisee has an excellent relationship with clients, consider a hand over period to allow a smoother and more effective transfer of ownership and of course ultimately success for you!

Steps to buying a franchise resale

So what do you have to look for when taking over a franchise resale? How can you be sure the business is sound? Surely it is more expensive to buy an existing business than starting up from scratch and why is it being sold – what’s wrong with it?

All of these questions you would be totally right to ask and equally right to expect clear concise answers from both the franchisor and the selling franchisee. These however would also be the questions you would ask the seller of a non-franchised business, they are the logical questions to ask. It is not that you need to be more or less diligent with your questioning about a franchise; you should in-fact be able to receive more comfort about a franchise resale than an independent business transfer or sale because with a franchise resale you have the franchisor to corroborate the information about the business involved. They will not be able to guarantee the information but they will know a lot about the particular business and will certainly have a view on its performance and potential.

These therefore are the key elements of successfully buying a franchise resale:

Information

The selling franchisee should produce a detailed overview that provides you with all the necessary information about their particular business to enable you to decide if you are interested or not in acquiring it.

This overview is not about the whole franchise opportunity, you will gain that information from the franchisor whilst going through your interview/fact finding process about which franchise business to join. This is about the specific business opportunity you are considering buying.

Other than the sales turnover levels and profit figures shown within the trading accounts, which should of course be up to date, the amount and type of information contained in a prospectus will vary according to business type. For example premises based businesses will have a Prospectus which contains details of the staff, the equipment both owned and leased, the premises etc, while a cleaning franchise for example will have simply details of staff and equipment and a single person consultancy business will be simpler still.

The Prospectus should also contain a description of the location/territory and the marketplace within which the business operates. It should also have the reason that the business is being made available for sale.

Most franchisors will assist their franchisees to write such a document or outsource that role to third party advisors.

Valuation

The business will naturally have an asking price attached to it and this should, in most cases, have a close relationship to the levels of income the particular business generates. An enlightened franchisor will have assisted the franchisee in arriving at the decision about asking price and the very best advice is for the franchisee to obtain a franchise specialist’s totally independent view as opposed to asking either the franchisor or their own accountant to value the business. The logic behind this is that you as the prospective purchaser will use an accountant who will arrive at a comparative value and if the seller has also taken independent advice the chances are both valuations will be fairly close and so the gap to be bridged through negotiations will be smaller than it otherwise might have been.

There are various ways to arrive at the ball-park valuation for a business but the majority of accountants will apply a multiple revenue to do this. That said, business valuation is not an exact science. Its purpose is to give a reasonably close idea about where negotiations on the final price should start from and there will be more than simply a profit multiple that decides what is eventually paid.

Negotiation

Negotiation is a delicate and often frustrating part of any sale/purchase because the buyer and seller have conflicting goals as each participant wants to get the most for what they have to offer.

As the purchaser you will need to believe you can better the seller’s performance and make enough money to cover the asking price; any finance costs and of course make a profit. The seller must be clearly demonstrating what the business can deliver and the capacity of the marketplace/opportunity that is there to be developed. The seller should also take into consideration that the buyer may be considering more than one opportunity so should not “push it too far”.

Negotiation is about compromise, about give and take and seeing the position from the others perspective. “Hard ball” play from either party negotiating simply ends in frustration and failure. That said, negotiations are mostly very friendly affairs with both parties knowing there is a mutually beneficial goal in sight – agreement.

If one side thinks they could have got a little bit more and the other side thinks they paid a touch too much the deal is probably at just about the right level.

Completion

Any business sale requires legal documentation and franchise resale transactions are no different. With a franchise resale however there are three parties involved; the seller, the purchaser and the franchisor. Yes, the franchisor has an interest in the transaction and should be a party to the final Sale and Purchase Agreement. This is because in a franchise resale the rights to use the business name, the logo and the knowhow remain with the franchisor so they must approve the terms of the sale of one of their businesses.

Advantages of buying a franchise resale

Franchising has been providing Americans with business opportunities for over 150 years, and as more franchise companies are becoming established, the number of businesses bought through the sale of existing franchises is becoming more and more popular.

The benefits of purchasing a franchise which is already trading are clear to see:

  • Cash flowing through the business from day 1

  • Brand presence in the local market place

  • Clients and customers from the start

  • Stock, staff and property (if appropriate) all in place

  • Business planning is easier to develop from known data

  • Smoother funding process due to the proven business history

Developing a business presence in a new territory can be time consuming and costly so the advantage of taking on an existing franchise, that is already known in the area and which has current customers and clients, is clear. That is not to say growing any business is easy – far from it – but it is easier to move on and drive a process that is already underway.

To speed up a rolling ball as opposed to starting it from a standstill position is always the energy efficient option.

The above positive elements which demonstrate why a franchise resale would be a strong option to consider also make the opportunity attractive to secure finance for your new business. All businesses will usually require some form of banking facility and many will require additional funding most often in the form of a loan. If not a loan then, at the very least, an overdraft facility is usually required to support a level of working capital.

When presenting a structured business plan to a bank to secure these facilities, the strength of the proposal and therefore the likelihood of its being approved will, in part, depend on your business projections. With an existing business there is clear evidence of what has been achieved by the current owner, so projections can be based on fact and this will give considerable weight to the proposal. This in turn will make it more likely to be accepted because the previous revenue history and brand presence, plus your drive and background all combine with a franchise resale to make this option the logical route into franchising.

Why buying a franchise makes economic sense

Most franchise businesses, especially re-sales of existing locations, have a customer base that is loyal and comfortable with the pre-existing corporate image. Few people like to risk their consumer dollars on an unfamiliar company product or service. This is particularly true if and when a familiar franchise with similar qualities or prices already offers that value. This brand awareness creates the potential for higher sales and lower marketing costs, both factors that increase the likelihood of success.

Franchises already have established methods of doing business. Through the test of time and competitive challenges, these systems are proven to increase sales and productivity. This lessens the guesswork, eliminates the lengthy learning curve, and reduces costly errors. In the end, these reductions mean more time for focusing on the true business at hand, customer service and satisfaction, higher sales, and higher profit margins.

Throw the “fear of going alone” out the window! Franchise companies have professionals dedicated to ensuring that franchisees have the support to get started. Indeed, as part of their growing franchise family, your new membership means you will have experienced staff to walk you through the shaky moments, in the beginning and ongoing throughout the years, whenever you need assistance. You will always be able to pick up the phone and reach supportive members of the franchise family.

With operational support comes training programs to assist you and your employees with standards of success. Since the franchisor has a vested interest in raising positive brand awareness, your success is important. For this reason, franchisors offer ongoing training, the sharing of new, cutting-edge techniques, system upgrades, service enhancements, and product developments.

Since many businesses fail from undercapitalization, access to financing is important. Obtaining financing is much easier for a franchisee because banks recognize the business brand and model of most franchisors. Banks know they have a better chance of receiving payments with interest from a business with a proven model and support system in place.

If you’re buying a brand new location or a franchise on re-sale from a retiring owner, either choice will require marketing. The franchisor provides assistance with proven marketing strategies for retaining and attracting customers. Frequently, franchisors conduct their own advertising and promotion on the national level without much or any cost added to the franchisee. In addition, staff usually helps with marketing plans and promotions for grand openings.

Because franchisors make large-scale purchases, prices for everything can be lowered significantly. This commonly includes uniforms, supplies, equipment, and even construction materials for a new location. Since relationships are previously established, bulk purchases or consignment acquisitions are more readily available.

Franchisors understand the reductions in sales caused by competitors. For this reason, most franchisors will agree to prevent the same franchise brand from opening within close proximity to the franchised location. Franchisees enjoy these territorial guarantees for as long as they own the franchise.

The Federal Trade Commission (FTC) helps lessen the prospective franchisee’s risk by mandating franchisors to provide crucial information about the business prior to signing a purchase agreement. This information includes any litigation, audits, aspects of the company’s history, and the names of other same-brand franchise owners and their contact information. Mom and pop businesses don’t have such an inside advantage.

There is a general lessening of anxiety in belonging to a professionally organized team. Yes, you do have to pay fees to the franchisor for the goodwill of a brand name, but the advantages listed above clearly offset those fees. Why? Even without considering all of the cost savings of marketing support and bulk-supply purchasing, the costly mistakes of an independent business owner are where the real expenses accrue. A smart business owner would much rather pay a fee for experience, support, and brand recognition that prevents expenses many times that amount from otherwise avoidable mistakes. Buying and operating a franchise just makes more economic sense.

Key considerations for buying a franchise resale

If you are thinking of buying a franchise in an established and mature franchise system, you should consider buying an existing business from an outgoing franchisee as there are many benefits to an investment of this nature – staff, customers and cash flow from the start, premises and stock in place and a proven business history to name a few.

While the benefits are clear to see, it is also important that you should not drop your guard when considering this type of purchase. All the rules which normally apply to the purchase of a franchise, apply equally to the purchase of a franchise as a going concern.

Here are the key areas you need to think about:

  • As well as your research into the franchise itself, you will also want to find out about the reasons for the sale – is the franchisee retiring, have they found that the business is not right for them, or more worryingly, have they discovered a problem on the horizon that may have a serious impact on the profits of the business (e.g. main street)?

  • Get advice from your accountant. How has the business performed, what do the audited accounts show, is the business profitable? It may not be if the previous franchisee has underperformed. You need to check if this is just a one-off, or if a large number of the network is having problems?

  • Is the asking price reasonable, look at other businesses for sale in your region and again, speak to your accountant. How long will it take you to repay any borrowing to buy the business? Is that a reasonable payback period? Can the price be negotiated; are all the fixtures and fittings, equipment, stock, etc included?

  • Take the trouble to investigate both the franchise and the franchisor thoroughly. Apart from the usual inquiries, try and speak to as many franchisees as possible to get their view as to the profitability and potential success of the franchise and of the support given by the franchisor.

  • Be aware of the fact that you are not only buying a franchise but the business itself and therefore you need to make sure that upon taking over the business you will not be responsible for the liabilities of the outgoing franchisee and that the outgoing franchisee warrants the past performance of the business etc. Finally, you need to be aware that you will become responsible for all the employees of the outgoing franchisee and should therefore take steps to protect yourself against any potential liability from those employees.

  • How is the sale being structured? There are two types of sale that the franchisee can employ; share sale or asset sale. These are both very different and it is important that you understand the implications of each. Ensure you seek legal and accountancy advice before committing.

  • Do you have enough capital and security to buy into an established business? The costs will be higher than buying a brand new franchise where the concept has not been established. However an advantage of purchasing an existing business is that if finance is required you will have existing accounts to demonstrate to the bank how the business has been performing.

There is a lot to consider, but taking over an existing established franchise business could provide a quicker route to a higher return, and should be generating income from day one.

How to identify the best franchise resale opportunity

It is not a case of finding the best Franchise Resale, but the best Franchise Resale that suits YOU. In order to find your ideal franchise Resale you need to ask yourself the same questions you would ask when considering buying a new franchise.

No two people are the same so it makes sense that not everyone will be suited to the same franchise. Don’t just jump at the first franchise name you recognize or consider to be a “good” franchise, as what is right for one person may not be right for you. While one person can make a success out of running a McDonald’s franchise, if you don’t like retail or want to be less hands-on, then it could be a disaster. So no matter how good the brand is perceived to be, if it is not right for you then you will struggle to make a success out of it.

A franchise is only a success if the franchisees are successful. This is why a good franchisor will spend a lot of time and money in recruiting only those who are right for their business. In some instances can only take one bad franchisee to ruin or put a massive dent in the reputation of the franchise.

The question “what is the best franchise resale for me” therefore requires a lot of consideration and self-analyzing. To help you find the right franchise business for you then you need to ask yourself the following:

As you will be working many hours in the franchise over a long period of time, you need to make sure that you would enjoy the work. List all your likes and dislikes, and then keep them at hand when researching opportunities. E.g. if you don’t like being stuck in an office every day, then you can discard any that encourage this. Or maybe you like being hands-on, again there are many franchises that require a hands-on owner.

What do you like doing?

Again list all of your strengths and weaknesses. Are you good at managing people? Selling? Talking on the telephone? Working in a team? Head for figures? Meeting clients face to face? Use your strengths to help identify franchises that you may be suited to.

What are your strengths and weaknesses?

Do you want to work in retail, b2b establishment, an office or from home? Or maybe you want to spend most of your time in a vehicle? Do you want to manage from afar? Would you be happy working in a team or by yourself?

What type of environment do you like to work in?

List all the industries you would like to work in e.g. fast food, business services, real estate, finance, children, pets, beauty, automotive, recruitment, etc? Consider whether you want to work in an industry in which you have experience or do you want to try something new? A benefit of franchising is that you don't need experience in a particular industry to buy a franchise as you will be trained in all aspects of the business.

What industries interest you?

Are you happy to travel a distance every day or do you want to work close to home? It may sound like a stupid question as most of us would like to travel less and spend more time at home. But what if your ideal franchise is not near you, what is more important, getting that franchise or spending time with your family and looking at another option?

If you take considerable time to answer all of these questions truthfully, then you will start to identify the type of franchises that would interest you and be right for you. Spending time now doing extensive research will help you to not make costly mistakes in the future.

Si se toma un tiempo considerable para responder a todas estas preguntas con sinceridad, entonces comenzará a identificar el tipo de franquicias que le interesarían y serían adecuadas para usted. Pasar tiempo ahora haciendo una investigación exhaustiva lo ayudará a no cometer errores costosos en el futuro.

Where geographically do you want to work?

Knowing what you can afford will help you to narrow down your list of franchises. E.g. Retail franchises are expensive so if you do not have much money, then you should rule these out. Home based franchises and mobile franchisees will tend to require less investment.

How much money do you have to invest?

What experience is important when buying a franchise resale?

No two franchises are the same so it makes sense then that each franchisor looks for something different in a franchisee. And whilst experience can be relevant for some franchisors, the majority look for certain traits and characteristics rather than experience. The reason being that good franchisors will teach and train franchisees everything they need to know about being a successful franchisee in their network. This is why franchising is ideal for those looking for a career change and wanting to pursue an entirely different line of work. Franchisors therefore don’t consider experience to be that important but instead focus on getting the right people for their franchisee. As mentioned there are some common traits and characteristics which make a franchisee successful, we have listed below some of these.

Successful franchisees are those who are 100% committed to making the franchise work and so they need to be motivated with a strong drive to achieve success. If a franchisee loses interest in their business, then it will be reflected in the success of the business. It is therefore evitable that a franchisee enjoys their work as they will be in this role for a long time and will be working long hours in the business. You therefore need to be enthusiastic for the product or service you are selling; the best sales people are those who truly believe in what they selling. You need to keep this in mind when looking at franchises of interest. There is no point in looking at those you think will make you the most money if you don’t like the actual work involved as it will only lead to you underperforming in the business and the business not reaching its full potential. So if you think McDonald’s will make rich but you hate the idea of working in a fast food restaurant then it is not the franchise for you.

Don’t be fooled into thinking that you can buy a franchise and then sit back and watch others run your business for you whilst the money rolls in! It does not work that way. A lot of the time you will be required to be hands-on especially at the start of your business venture. You will also be required to be undertake any task no matter how menial it may be. Once your business is more established and you are in a position to open another unit i.e. become a multi-unit franchise owner, then you may be able to step back and take a more management role in the running of the businesses.

Franchisors also look for those who learn fast and have the ability to transfer what they learn to others. This is especially important in a franchise that requires managing people as the franchisor will want someone who can pick up quickly how things are done and who is then able to train their staff adequately in the business operations; good staff equals a successful franchise.

A business can only become a franchise if it has systems and procedures that can be replicated. A successful franchisee is therefore someone who can follow these systems and operate the business the way the franchisor expects it to be run. Franchisors therefore tend to look for those who can follow rules and are not tempted to do their own thing!

As funny as it sounds, experience in an industry is not always beneficial to a franchisor. The reason being if you already have previous experience in a similar business then it may be difficult to teach you how to operate their franchise in the way they want you to run it as you may have conflicting ideas. Some franchisors will ask for experience, some will not but will focus more on the interest you have in the industry. For the same reason some franchisors look for those who do not have all the administrative and entrepreneurial skills necessary to start a business as they want to teach them how to do it their way. Franchisors believe that management skills, attention to customer service and sales skills are the most important qualifications when recruiting franchisees.

Do you want to be owner operator or absentee owner?

Whether you should become an owner operator or an absentee owner of a franchise will depend on a number of variables. Some of these depend on the franchisor, some depend on the type of service or product you’ll offer, and some will depend on your personal preferences, financial position and overall goals. In addition, if you’re buying a resale, exactly how much you take a “hands-on” approach will depend largely on whom the seller has for a manager.

Approximately one quarter of franchisors require buyers to commit to a clause in the franchise agreement that precludes absentee ownership. This is a sizeable percentage of the approximate million franchise brands in the U.S., and a percentage that is growing.

However, that still leaves approximately 3,500 franchisors who do allow absentee ownership. The option to handle the franchise as a passive investment is definitely available for many good brands. But another consideration will be the service or product you’ll be offering. Some franchises require more hands-on than others. For example, if you buy a franchise with the need for a high level of expertise in that field or a license that requires a degree in medicine, law, or aeronautics, there’s a good chance that you’ll need to become an owner operator. If, on the other hand, you’re considering a burger joint, you’ll probably be fine hiring a good general manager (GM) who follows the franchisor’s standardized method of operation.

Regardless of the types of services or products offered by different franchises, the most important influence should be your personal preferences. Are you the type of person who would rather know exactly what is happening on an hour by hour basis guided by your own influence? Do you like to look in the customer’s face and shake hands as the owner, offering a personal touch to customer service? Or are you an investor who would rather delegate responsibility to a seasoned manager? Even if the latter choice is yours, know that there are some things you should handle personally during the establishment of managerial operations. For instance, initially you should learn about the key positions of the franchise and how to fulfill those duties attached to them. Only after an experienced team is in place is it safe to spend less and less time at the franchise.

Additionally, even as an absentee owner, you should perform periodic reviews to protect your investment. As an owner operator you would ensure that cash registers balance, that sales volumes are meeting or exceeding expectations, and that marketing strategies are being implemented. As an absentee owner, most of these responsibilities will be given to management. But this does not mean you shouldn’t pay attention to many of these areas. Your money will be at risk; thus, periodically reviewing these points is very important, and might call for a database that you can view electronically as frequently as you choose.

You must also consider the cost of operations for your franchise, and include the expense of hiring a GM to replace your contribution of time. If the expense for a GM significantly lowers your franchise profits, you may not have the capital to maintain his or her salary. This would almost certainly require you to become an owner operator.

Are you just an investor seeking a passive income or are you a type-A personality ready to make a career out of controlling your own operation? Are you buying a job or an investment like a stock or bond fund? Only you can answer this question to your own satisfaction.

Finally, if you’re purchasing a franchise re-sale, how much time you spend micro-managing will rest upon the seller’s prior practice. Was the seller an absentee owner or was the seller also the GM? If the seller has a good management team in place and is already profitable, his or her absence from daily operations will probably not matter very much. Conversely, if the seller was also the GM, then you’ll need to fulfill that role as an owner operator, at least until you can train someone to take over as GM.

If you buy the right franchise, hire the ideal employees in key positions, and have the capital requirements, a franchise re-sale is an ideal way to add to your passive income. Nonetheless, if you need to build and create and enjoy a career, then becoming an owner operator is probably a better choice to satisfy your goal to achieve personal success.

Franchisor support

While franchise business ownership isn’t for everyone, those who choose to pursue a franchised business model choose to do so for numerous good reasons, one of which is most likely the support that the franchisor provides to each franchise owner. A very common question that I have been asked countless times is “what kind of support can/should I expect from my franchisor?” Unfortunately, there is no perfect answer to this question, as there are a number of factors involved, including size and maturity level (age) of the franchise concept. For the sake of this article, we will consider a more mature brand with 75 or more franchisees currently operating. Below I have listed the most common support areas (not necessarily in this order):

Don’t be surprised or disappointed if your franchisor does not offer all of these benefits. The key is to make sure that the franchisor is meeting the most immediate needs of its franchisees while also prioritizing appropriately to provide additional services and benefits as the organization grows.

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