- Purchasing an existing franchise can set you up for success by offering a quick return on investment.
- Research the franchise thoroughly before investing in the opportunity. Financial disclosures must be made prior to any sale of a franchise.
- Obtain a legal team to help you manage all of the tasks needed for a safe and successful franchise purchase.
If you’re interested in franchise opportunities, you may be wondering if there is an alternative to buying and launching a brand new franchise. There is, and it’s known as a franchise resale. In this scenario, instead of starting up a franchise on your own, you purchase one that’s already operational from the existing owner, or franchisee.
A franchise resale can be an attractive option for buyers. It offers some advantages and mitigates some of the initial growing pains that come with opening a new franchise. That doesn’t mean that a resale is without risks and downsides, however. It’s important to understand how to approach a resale in order to avoid some potentially costly pitfalls.
Below are four things you’ll want to evaluate before assuming ownership of an existing franchise.
1. What is the seller’s motivation?
There can be many reasons why a franchisee chooses to exit the existing business. Perhaps their personal situation has changed, and they no longer have the time to devote to the business to make it successful. Or maybe they’re nearing retirement or relocating to another city or state. The one reason most sellers won’t likely disclose, though, is that the franchise isn’t profitable.
Asking the following questions of the current franchisee (and obtaining related documentation) will help inform your decision:
- Why are you selling your franchise?
- How has the business performed financially over the past two years?
- What are the trends in this area and how might these affect the business positively or negatively?
- What role does the location play in the success or struggles of the business?
- Will there be any problems renewing the lease?
- What are the market conditions that could affect the business now and in the future?
2. Is the business successful?
There are plenty of successful franchises for sale. But there are also many sellers motivated to sell because they’re consistently losing money. You’ll need to evaluate which situation your seller is in based on the answers to the previous questions. If the business is currently unsuccessful, but you see an opportunity to turn it around, then don’t disregard it too quickly.
Just as there is no guarantee of continued success in an established and profitable business, there is no guarantee that you’ll be unsuccessful based solely on the fact that the business is currently losing money. Many successful franchise buyers have turned failing businesses around. Conversely, many buyers have acquired successful businesses and ran them into the ground, either because of a lack of knowledge or a lack of commitment to the business.
Consider the current overall state of the business. If there are good opportunities and a solid market, a failing business may be in that state based on its current ownership. Perhaps the owner encountered an unforeseen circumstance that prohibited him or her from devoting the time necessary to properly run the business. Or maybe they hired the wrong employees to execute the tasks necessary to make the business succeed. You may be able to improve the business with the proper investment of time or staff.
3. What is the business’s value?
Determining the business’s value is an important step before investing in a franchise. According to the Corporate Finance Institute, business valuation can be calculated in several different manners and should be provided before investing in franchises. Financial records should be reviewed prior to investing, including operations statements, balance sheets, and stockholder equity reports. Review at least two to three years of past financial data.
4. Is franchise ownership a good fit for you?
While you may avoid some of the intensely grueling hours required to start a franchise from scratch, operating a business is never an easy task for an owner. Evaluate the time and investment necessary to make a business successful or to maintain one that is currently successful. Be realistic about the time and resources you can invest in your new business.
As mentioned above, if you’re buying a business that hasn’t been extremely profitable, but you see potential to make it so, it will require more of your time and a greater commitment than buying an establishment that’s already successful.
What professionals will you need to retain?
From the time you identify the type of franchise you’re interested in acquiring to when you sign on the dotted line, it’s imperative to involve the necessary professionals. Work with a reputable business broker to find resale franchise opportunities. Find a tax professional who can thoroughly evaluate the financial state of the business, including earnings, tax liability and overall profits. And finally, hire an attorney that can draft the purchase agreement in a manner that adequately protects your best interests.
Franchise disclosure agreements should be reviewed as part of the process. Franchises are legally required to provide a franchise disclosure as a pre-sale document to new buyers.
Ultimately, you will need to involve the franchisor as well. Request that they investigate the franchise just as they would as if you were starting a brand new location. By doing your due diligence and involving all of the necessary professionals, you will have your best chance of being successful in an acquired franchise business.