Top 5 Considerations When Buying a Franchise Resale
What is a franchise resale?
Not everyone is aware of the term “franchise resale”. According to the U.S. Department of Commerce, franchise establishments number slightly higher than 10% of all U.S. businesses (453,326 franchise enterprises vs. 4,333,046 total enterprises). It makes sense that of the businesses for sale in a market, some are franchise locations and the term for the sale of an existing franchise business or transfer is known in the industry as a “resale”. The franchisor (franchise parent company) sold the location (territory) initially to a franchisee and now that owner is selling a new franchise owner. Popular locations in some mature brands may be re-sold multiple times as the franchisee decides to capitalize on their hard work and investment by selling to new owners.
1) Resale vs. New Territory
The enormity of the US franchise market stated above means that the number of resale locations is also impressive. Keep in mind that usually the availability of a resale location in your desired area and in your favored industry has a lower probability of occurring.
For instance, if you have your mind set on buying a resale in a particular senior care franchise in Atlanta, there may not be any existing locations for sale there by that franchisor at the time you are seeking a business. You might broaden your search to resales by the top five senior care franchise concepts or any senior care concept. There will be a higher probability that you will find a new territory available in your desired location and industry over a resale so you may have to wait months or years for the right opportunity or widen your outlook to other related or non-related industries.
2) Reasons For A Franchise Resale
When speaking to candidates about a franchise resale, a common question is, “Why is it up for sale?” There could be any number of reasons and most are not related to the status of the business itself.
• Retirement – it was always part of the plan to eventually sell the business
• Relocation – a spouse is making a career change or they are moving to be closer to family members (grown children & grandchildren)
• Other business interests – they want to concentrate on other businesses they own
• Franchise term is coming due – the term may be five, ten or fifteen years and many franchisees make decisions about renewing or selling the business at the term milestone
• Planned exit – they may have entered into the franchise agreement knowing at a specific revenue point they would sell the businessNot a good “fit” – the business wasn’t right for them and their goals
• Life-altering change – illness, accident, divorce, care of elderly parents
Think about it. If the franchise is mature and well-known, the sale could be due to any of the above and doesn’t mean the “territory” is a loser or the business a failure. It will still be part of your due diligence to vet the area, review the financials and validate by speaking with other franchisees just as if you were buying any independent business or new franchise territory.
3) Identifying the BEST Franchise Resale
A franchise is only a success if their franchisees are successful. Good franchisors will recruit only those who are right for their business. They have a reputation to maintain and know what financial requirements and desired personal characteristics to meet-true even in a resale situation.
You are not just seeking the best franchise resale opportunity but the one that suits you best. So you will need to ask yourself the same questions that you would ask when considering a new franchise territory. Rushing to buy a business that is not right for you will cause you to struggle to make it a success.
There is a lot of consideration and self-analysis to undertake:
Consider your lifestyle desires: There are some models that allow semi-absentee (manage-the-manager) ownership but many franchisors require an owner/operator (full-time, hands-on owner). Just because you are purchasing an existing business, doesn’t necessarily mean you will put in less hours or that you can invest and place a manager to run the business.
Another consideration is distance. Would you be alright with traveling a distance every day to your business location or prefer to work at home? Of course, most of us would like to travel less and spend more time at home but what if your ideal franchise is not near you. Would it be more important to get that franchise resale or spend more time with your family and look at other options?
Work environment preferences: Would you rather work from a home office, a small professional office or a retail location where customers come to you? Are you happy working in a team or by yourself? Would you prefer to work with consumers or business customers (B2B)? All things to consider.
Industry interests: You could work in a similar industry to your background and experience or you might want to start something new. Maybe you are in pharmaceutical sales now and you’d like to work in fast food, business services, real estate, finance, children, pets, beauty, automotive, or recruitment, etc. The beauty of franchising is that you don’t always need experience in the particular industry to buy a franchise since you will be trained in all aspects of the business.
Strengths and weaknesses: Are you good at managing people? Selling? Talking on the telephone? Working in a team? Have a head for figures? Meeting clients face to face? Assess your strengths to help identify franchises that may suit you.
Taking the time to a go through this analysis, will help you find the best fit for you and avoid costly mistakes.
4) Advantages of Buying a Franchise Resale
The benefits of purchasing an existing franchise:
• Cash flowing through the business from day one
• Brand presence in the local market place
• Clients and customers from the start
• Stock, staff and property all in place
• Business planning is easier to develop from known data
• Smoother funding process due to the proven business history
A new territory start-up can be time consuming and costly so the benefit of acquiring an existing franchise, already known in the area and having current customers and clients, is obvious. Growing any business is far from easy but one that is started and ongoing is little more stress-free.
As an existing business, writing a structured business plan to obtain funding based on historical financials from the current owner along with the brand presence, your background and energy will make it more likely to obtain approval. If not applying for a loan, then obtaining a credit line to support a level of working capital could be fairly straightforward.
5) Crucial Factors in Buying A Franchise Resale
Even though the benefits may be obvious in buying a franchise resale, it is important not to let your guard down when considering this type of purchase. All the guidelines normally applied to the purchase of a franchise, are equally appropriate in acquiring an established franchise location.
Key issues to consider:
• Franchise Culture: Do your due diligence on the franchise as well as your research into the business itself. Speak with other franchisees and get to know the franchise culture. Some are stricter than others about reporting, etc.
• Business Performance: Get advice from your accountant about business performance and if the audited accounts show that the business is profitable. If the previous franchisee has underperformed, is it due to their abilities/energies or are others in the system having problems?
• Asking Price: Look at other businesses for sale in your area and see if the asking price is reasonable. Again, speak to your accountant. Is there a reasonable payback period if you are procuring a loan? What is included in the price (fixtures and fittings, equipment, stock) and is it negotiable? Franchisors may give their franchisees guidelines as to how to assess the asking price but they leave it up to them to make the final determination.
• Other Funds: Even though an established business, the franchisor may require that you have additional working capital in surplus to the price you are paying the current franchisee for acquiring their business. As well, you may have to pay the franchisor a normal or reduced franchise fee or the transfer fee paid by the current franchisee may suffice.
• Liability: Since you are not only buying a franchise but the business itself, you need to make sure that when taking over the business you will not be responsible for the liabilities of the outgoing franchisee. Your lawyer can help here. If there any employees working currently in the business, you will become responsible for those employees and need to consider any potential liability.
• Sale Structure: Is the sale a share or asset sale? Since they are both very different, it is important that you understand the implications of each. Before you commit, seek advice from your lawyer and accountant.
• Financial Means: Do you have enough capital and credit worthiness to buy into an established business?
Typically, the costs will be higher than buying a brand new franchise but that you have existing accounts to demonstrate business performance will help when seeking financing. Most franchisors don’t provide financing and highly discourage the current franchisee from offering owner financing.
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.
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