Pros and Cons of Buying an Existing Franchise
What’s better than buying a franchise? Could it be investing in an existing franchise for sale instead? There are many reasons why this 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.
On the other hand, if you get presented with the opportunity to buy a franchise that is already in operation and has performed well, you can be more confident that you’ll succeed. These opportunities arise when a current franchise owner decides to retire, move away or realise their capital.
As with any business decision, there are pros and cons to buying a franchise that is already up and running. Let’s take a look at a few of each.
Reasons why you should buy a resale
1. You can get started almost immediately
As the business is already up and running, you may be able to start doing business straight away, generating cash flow from day one. In contrast, buying a franchise that is not established will mean you have to choose the right location and deal with all the issues that come along with this. Having to research different areas and then fit out your chosen premises may involve waiting up to a year before you can start doing business.
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2. You can operate in your chosen location
You may want to start a business in your local community, but sometimes the market is saturated, and there would be too much competitions. However, you may be able to buy a franchise resale in your preferred area, which means you’ll no longer have to move further afield or invest in a different franchise.
3. You inherit an existing customer base
One of the toughest parts of starting a new business is building a robust customer base. To raise awareness for your brand, you’ll probably need to spend time and money on expensive marketing and promotional activity. However, if you purchase an existing franchise, you’ll inherit a customer base, along with the income it generates. This will enable you to achieve the turnover of an established business rather than that of a start-up.
4. You inherit trained employees
If your franchise needs employees to operate it, you’ll also inherit a workforce. This saves you from having to recruit and train new members of staff. Having the knowledge and support from a team of employees will be a valuable asset to your franchise.
5. You know what to expect
Instead of having to guess whether your franchise will be successful, you can review actual performance and financial data to establish whether or not it constitutes a sound investment. It is much simpler to assess a known entity than a start-up.
Reasons why you should be wary of buying a resale
1. Extra due diligence may be needed
On top of the usual research that you’d perform if you were buying a new franchise, 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
If the business has been neglected, you should be prepared to spend some money on top of the purchase price to ensure that it becomes a successful franchise.
3. You may not be compatible with the existing business
You need to consider how your skills and experience will impact the success of the franchise. If a franchise has not been performing well, you may be confident that you can turn things around. However, if the franchise is very lucrative, you need to think about how your way of doing things will affect its performance. Understand how much of the franchise's success is down to the existing franchisee and be realistic about your own capabilities and attitude.
4. You must carefully review the franchise agreement
While you carry out due diligence, you’ll undoubtedly ask the existing franchisee many questions. But you shouldn’t assume that the franchise agreement, fees and terms will remain the same for you. The franchisor has the right to change any elements of the franchise agreement if they wish to do so, and these amendments may be more significant than you first realised. Remember, it’s recommended that you seek the advice of a franchise solicitor, who will be able to review the franchise agreement and lead any negotiation discussions, if necessary.
5. You may have to pay a transfer fee
It’s unlikely that you’ll be expected to pay a franchise fee, but the franchisor may charge a transfer fee that either you or the previous franchisee must pay. You may also be required to pay for your initial training too, as this is a cost that the franchisor wouldn’t have had to cover, had the existing franchisee not chosen to leave.
Investing in an existing franchise is a great way to start your own business. There are many benefits, but you should be aware of the pitfalls too. Just as with any franchise purchase, you must ensure that you do your homework and consult a solicitor that specialises in franchising before you sign on the dotted line.
Selling your franchise
Let’s imagine you’re a successful franchisor and you’re moving away, so you’d like to sell your business. The good news is that franchises are easier to market and sell than independent businesses, as they have the added bonuses of franchisor support and a recognisable brand. But how do you go about selling your franchise?
The first thing you should do is get in contact with your franchisor. It is in their best interest that any franchise resales within their business go smoothly, as they could have a negative impact on its reputation and future success if they don’t. What’s more, a new franchisee could boost turnover and therefore increase the royalties that the franchisor receives.
Next, you should find out exactly how much support your franchisor is willing to offer. Some will provide more than others, but it’s important to know what you’ll have access to as early as possible. Also, re-read your franchise agreement to find out whether you are obliged to pay any transfer fees. You may be charged up to £25,000.
Once you have all this information, you’ll need to start the valuation of your business. The franchisor determines the sales price, but the way this is calculated often differs. Usually, it is a multiple of your gross revenue or cash flow.
When you have a price for your franchise, you should compile a business summary or “offering memorandum”. This is simply the marketing package that you will use to entice buyers. Your franchisor should advertise the resale opportunity, but if you are not satisfied with their level of support, you can turn to a business broker. They’ll be able to market your business through online databases that reach a high number of potential buyers.
During this process, don’t forget that your documents should accurately demonstrate the profitability of your business. You will be forced to disclose all relevant information before the sale goes through, so be aware that if the data reflects badly on your business, there may be limited interest in your business. For example, Item 20 in the Franchise Disclosure Document lists the transfers, closures and non-renewals experienced by the business. In a good franchise, these figures should be low. If this is the case, you will be able to impress more entrepreneurs.
Once you’ve selected your preferred buyer, you’ll have to consult your franchisor. They are likely to have put conditions in place for this process and must approve the potential franchisee before you can go ahead with the sale. Typically, the franchisor will review the prospective buyer’s net worth, credit score or business experience.
Now, negotiate a price that both parties are happy with and make sure you send the buyer a copy of the Franchise Disclosure Document at least 14 days before the transfer takes place. The buyer may also have to attend one of the franchise’s discovery days like other franchisees before they can buy the franchise. On the other hand, many franchisors don’t take an active role in this process, and simply evaluate the resale agreement.
Once you’ve completed these steps, you will be able to sell your business and hand it over to the selected buyer. Remember, it is vital that you are always honest about the history of your franchise and transparent in any dealings with potential buyers. This way, you can ensure that the resale process runs smoothly and that there is no ill feeling between you further down the line.
Alice Tuffery, Point Franchise ©
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