Franchise Resales: Buying a Previously Owned Franchise

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buying franchise resale

Originally posted on 26/09/2017. Updated on 20/05/2019.

Franchising in the UK is on the up. The franchising industry generates more than £15 billion for the UK economy, a figure that has increased by 46 percent in the last ten years. There are more than 44,000 franchise business units in the UK, 97 percent of which are running in profitability (BFA-NatWest survey). Clearly, more and more entrepreneurs are taking advantage of the franchise model as a low-risk business venture compared to the unpredictable independent start-up route.

But there is a way that prospective franchisees can reduce risk even further by purchasing an existing franchise unit. Franchise resales occur all the time in the franchising industry when franchisees decide to retire, relocate or pursue other interests and give franchisees the opportunity to take on a business that is already up and running, boasting a secure market presence, a good location, existing customers, a positive cash flow and trained staff.

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Advantages of Franchise Resales

While some people relish the challenge of starting their own franchise unit, there are many benefits for those who purchase a pre-owned franchise. Here, well take a look at the main ones.

You can access accurate profit projections.

If you launch your own franchise unit, youll have a good idea of the brands previous successes, but it will be hard for you to predict exactly how well the business will do in your specific location, with its specific local population. The Franchise Disclosure Document should provide vital information, but you will have no way of knowing whether the financial projections provided are accurate and achievable. Franchise resales eliminate this uncertainty. If youre taking on an existing business, youll have access to the previous franchisees actual financial statements, so you can get a good understanding about how the business will perform in the future. Of course, as with any business, you will still need to work hard to ensure that it continues to run in profitability.

There will be a ready-made customer base.

Depending on the sector that the existing franchise belongs to, it is likely to have a pool of loyal customers already. If not, there will almost certainly be an existing awareness of the brand in the local area. This will reduce the need for marketing campaigns, which can demand a huge amount of time, money and effort in a new franchise unit.

It will already have a workforce of experienced staff.

If the franchise has been turning over a profit, it probably has a solid team of employees already in place. As a result, you will not have to spend time and money recruiting new workers. Whats more, not only will the staff have an existing knowledge of the business and its strategies, but also, they are likely to be skilled and knowledgeable, which means that the franchise can run at maximum efficiency from the get-go.

Profit can be made sooner.

The costs involved in setting up a new franchise unit can be substantial, so buying a franchise unit that is already kitted out and has brand awareness and a workforce means that the initial investment should be lower. As a result, your breakeven point will be much sooner than if you had started a franchise unit from scratch, allowing you to make a profit in a shorter space of time.

How to Value a Franchise Resale

Lets suppose that youre an existing franchisee looking to sell your franchise. How do you go about this?

The first step is to establish whether your franchise unit is successful or not. If it is losing money and youre not sure that this will change under new ownership, the most sensible thing to do would be to walk away. If, however, the business has a proven track record of success, valuation should be relatively straightforward.

To start the valuation process, youll need to use your financial statements to determine the net cash flow. To get to this figure, deduct business-related expenses from the profit generated. Then, this number should be multiplied to calculate the value of the franchise unit. The number of times it should be multiplied depends upon a couple of factors, including the stability of the cash flow and the forecasted business growth, but a profitable business would be valued at between two and five times the net cash flow.

Franchise resale valuations are never exact. The franchisor may have different expectations of the business. So the next step in the process is the negotiations, so that any gap in the valuations can be closed. It is recommended that you consult an independent franchise specialist for advice, as they will offer impartiality and support during the negotiation discussions.

It should be noted that whatever price is paid for a franchise resale, it is likely to be significantly higher than that of a new franchise unit. This additional expense can usually be justified by the fact that it has an existing customer base and is likely to have existing orders, but you will be able to make a profit almost immediately.

Conclusion

So, is buying a resale franchise a good idea? Resale opportunities can be a great way to get into the franchise industry without the stresses and worries associated with starting a new franchise unit from scratch. The most complicated part of a franchise resale is its valuation, and determining whether you are paying a good price for it, but you can seek support in this stage from experienced franchise professionals. To conclude, if you are sensible and perform thorough research, buying a pre-owned franchise can be a fantastic opportunity to make a profit quickly without the hassle of building a franchise unit from the ground up.

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