When you decide you’d like to become a franchisee, you’ve got two options to consider: setting up your own unit or buying an existing franchise business. Here, we look at the pros and cons of putting your money into a franchise resale.
There are many reasons why investing in a franchise resale could be the right decision for you. After all, when you start a franchise business, you’re bringing a brand, product or service to a new area. The company may have successful franchises in other locations, but that's no guarantee that it will work for you. But if you have the option of buying an existing franchise unit already in operation and performing well, you can be more confident you’ll succeed.
Let’s run through the pros and cons of choosing the franchise resale route.
Advantages of buying an existing franchise
1. You know what to expect
Most prospective franchisees have a good chance of success, but never know for sure whether their future venture will pay off in their chosen location. As the buyer of an existing franchise unit, you’ll be able to review actual performance and financial data to understand its level of profitability. So, you can be fairly confident your franchise unit will flourish into the future.
2. You can get started almost immediately
As the franchise unit is already up and running, you may be able to start doing business straight away, generating cash flow from day one. On the other hand, setting up your own business usually means choosing a location and fitting out your premises. If you’re dedicated to making the right choice, you may have to wait up to a year before you can start doing business.
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3. You can operate in your chosen location
You may want to start a business in your local community, but if the market is already saturated, you could lose business to your competitors. If you get the chance to buy an existing franchise unit with a good track record, you won’t have to move further afield or invest in a different company.
4. You inherit a customer base
One of the toughest parts of starting a new business is building a robust customer pool. To raise awareness for your brand, you’ll probably have to spend time and money on marketing and promotional activity. But if you purchase an existing franchise, you’ll inherit its customer base, along with the income it generates. As a result, you’ll be able to achieve the turnover of an established business rather than a start-up.
5. You inherit trained employees
If your chosen franchise unit has a team of employees, you’re likely to inherit it and avoid paying the costs involved in recruiting and training new members of staff. Having a knowledgeable and experienced workforce already in place will be incredibly useful as you take on the business.
Disadvantages of buying an existing franchise
1. Extra due diligence may be needed
The franchise unit you buy will have been shaped by the previous franchisee, and you won’t know the details of its history until you ask about them. So, on top of the usual research you’d do if you were investing in a new franchise unit, you should also ask the following questions:
- Why is the current franchisee leaving the business?
- Will the current staff remain working in the franchise?
- Has the franchise consistently performed well?
- Are there any changes or developments planned for the local area that may affect the profitability of the franchise in the future?
The more informed you are before you sign the franchise agreement, the better.
2. An additional investment could be required
Some franchisees sell their business because it’s not performing as well as they’d hoped it would. This isn’t always a warning sign – you may be able to put more money, hard work and passion into the business than the previous owner did. But if the unit has been neglected and you decide to take it on, you should be prepared to spend some money on top of the purchase price to make sure it becomes a successful franchise business.
3. You may not be compatible with the existing business
You should take some time to consider how your skills and experience will influence the success of the franchise unit. If a franchise has not been performing well, you may be confident you can turn things around. But if the franchise is very lucrative already, you need to think about how your approach will affect its performance.
Although it may be hard, try to be realistic about your own capabilities and attitude, and assess whether you’re a suitable buyer for the particular business you’re examining.
4. You should review the franchise agreement very carefully
While you carry out due diligence, you’ll probably ask the existing franchisee many questions. But you should never assume the franchisor’s fees and terms will be the same for you as they were for the previous unit owner.
The franchisor has the right to change any elements of the franchise agreement if they want to, and these amendments may be more significant than you expect. We always recommend you talk to a franchise solicitor, who will be able to review the agreement and lead any negotiation discussions if necessary.
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5. You may have to pay a transfer fee
As your chosen business will already be up and running, you probably won’t be expected to pay a franchise fee – but the franchisor may charge a transfer fee. Depending on the franchise, either you or the existing franchisee would have to submit this payment.
You may also be asked to pay for your training too, as this is a cost the franchisor wouldn’t have had to cover if the existing franchisee hadn’t left.
Weighing up the pros and cons
Buying an existing franchise unit can save a lot of money and help you reach your break-even point sooner than you would if you started a franchise business from scratch. Negotiating resales can be tricky, but if you’re aware of the potential issues and take action to protect yourself from them, you should be able to minimise risk.
We recommend you consult a specialist franchise solicitor to guide you through the resale process. They’ll be able to share any concerns they have and make sure you’re investing your money wisely.
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Alice Tuffery, Point Franchise ©