What to Look Out For When Buying a Franchise Resale

24/02/2018 08:00 | Start a business

What to look out for in franchise resales

If you’re considering buying a franchise resale, here’s what you need to look out for before you make any commitments.

Why is the franchise up for resale?

Arguably the most crucial point to consider is why the franchisee is selling the franchise. Some people may sell their business to retire, start a new business venture, or earn a lump sum that they can invest in or put towards personal savings. However, you need to consider the possibility that the franchisee has put the business up for sale because it hasn’t performed as well as they’d hoped.

Therefore, do your research so you can determine whether this is a viable business opportunity. If not, it’s probably time to consider other franchise investment opportunities.

What is the franchisor’s track record?

Make sure you do your due diligence by researching your prospective franchisor thoroughly so you can get a clear idea of their track record. You’ll need to look at both the most successful franchises and the worst-performing franchises to get a reliable picture of the network’s overall success rate.

Has the franchisor been involved in any recent legal disputes or controversies? Have employees complained of poor treatment or lousy working practices within the network? These are vital questions to ask yourself before you sign the contract.

What kind of training and support will you receive from the franchisor?

If you're new to franchising, you may benefit from being part of a franchise network with more training opportunities and a more substantial support structure. Many franchisors will provide an initial training programme to help you get to grips with the business, followed by ongoing training as part of your franchise development.

Is the franchise in the right location?

Even if the franchisor has performed extensive research to determine the most suitable location for the franchise, this doesn’t guarantee the business will be a success. Look at the demographics, accessibility, visibility and transport facilities in the area to get a better idea of what your potential footfall might be. The most successful franchises will have rigorous criteria for determining the right location, and while this minimises the risk of ending up in a weak position, it offers no guarantees.

Check if the franchise will have exclusive territory rights, which will prevent another franchise of the same network from setting up within a specified area. This could help you acquire and retain a broader customer base over time, although an exclusive territory may not be necessary if there’s little direct competition in the area.

Is the business overvalued?

The only way to get an accurate evaluation of the business is to consult an accountant, who will be able to confirm whether the company is overvalued or valued appropriately (or undervalued). An accountant will analyse the P/E (price-to-earnings) ratio by dividing the value of the franchise by its net profits. They may also look at the business's assets/liabilities and perform a cash flow forecast to predict its future value.

With professional, impartial advice, you’ll be able to make an informed decision once you’ve considered your next franchise investment opportunities.

Is there a cross-default provision?

If you have plans to buy several franchises with the same franchisor, check your contract for a cross-default provision. If this clause is included, it will permit your franchisor to default on all your franchises if just one of your businesses fails.

What kind of financial support is available?

Fortunately, many franchisors have good relationships with lenders, who may be able to offer you preferential rates for your franchise resales. If you decide to use another lender, however, make sure they have expertise in franchise lending, as a regular bank may not be very familiar with this sector. Your lending options will also depend on your credit history, so it might be a good idea to check your credit score beforehand.

Does the franchisor require any specific requirements for prospective franchisees?

Some franchisors will expect franchisees to have a minimum level of experience in managing a business, while others may require an industry qualification or professional accreditation. However, many others are looking for hard-working, ambitious people who are ready to run and grow their own business under an established brand.

Is the franchisor a member of the British Franchise Association (bfa)?

Check if your franchisor is a member of the bfa, the self-regulatory body for the British franchise sector. This will ensure that the brand has a proven franchise system and conforms to the bfa's strict accreditation criteria regarding ethical and industrial standards. You can find a full list of bfa-approved franchisors on its website, as well as bfa-approved solicitors with expertise in the franchise sector.

It’s also a good idea to get talking with the network’s most successful franchises so you can get direct feedback on their experiences and whether they’d recommend the network. They’ll be able to tell you more about the brand culture, the training and support they’ve received, and how they’ve managed to build a profitable and sustainable business.

What is your goal?

Even if a franchisor expects all its franchisees to achieve a steady income, you need to make sure this is enough for you to meet your long-term financial goals. For example, if you’re planning on running a franchise for a ten-year contract before putting it up for franchise resales to earn a significant lump sum, many factors could affect your financial performance. The franchise fee, cost of supplies, marketing, customer acquisition and retention rate, rent and economic trends can all have a significant impact on your revenue and net profit.

Make sure your business plan accounts for the best and worst-case scenario, and consider applying the SMART criteria: specific, measurable, achievable, relevant and timed when determining whether franchise investment opportunities are right for you.

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