Looking into franchise resales? Don’t forget to ask these important questions before handing over your money for a previously owned franchise unit.
Like all business opportunities, franchise resales come with their own unique set of processes and complications. They can be a fantastic way to join the franchise industry, but it’s crucial to do your due diligence before agreeing to take on a business. Keep reading to find out more about how to buy an existing franchise unit.
What is a franchise resale?
A franchise resale is the process of putting an existing franchise unit on the market. A franchisee will have already set it up under the guidance of the brand’s franchisor - or run it since they bought it through a franchise resale agreement.
A buyer takes on the business and the responsibility for running it to the franchisor’s specifications. They become the new franchisee and business owner for the unit and receive training and support from the franchisor.
So, why would you buy a previously owned franchise business? Well, it saves you a lot of time and energy, as you won’t have to set up the business; you simply pick up where the previous franchisee left off. Although franchise resales often cost more than building up a franchise unit from scratch, they’re a quick and convenient way to enter the business world.
10 questions to ask when considering franchise resales
1. Why is the franchise up for resale?
Arguably the most important point to consider is why the franchisee is selling their business. Many people might make the decision to retire, start a new venture or earn a lump sum to put towards personal savings. However, some business owners put their unit up for sale because it isn’t performing as well as they’d hoped it would.
So, do as much research as you can to determine whether you’ve found a viable business opportunity. The franchisor should be able to show you financial statements and other proof of positive performance.
2. Does the franchisor have a good track record?
Evaluating a franchise resale opportunity is about more than just researching the business unit; you should take the time to look at the franchisor’s track record too. Does the franchise as a whole have a positive reputation?
You’ll need to explore both the most successful and the worst-performing franchise units to get a full picture of the network’s overall success rate. You should also try to find out whether the franchisor has been involved in any legal disputes or controversies, and whether employees have complained of poor treatment or working practices.
3. What kind of training and support will the franchisor provide?
If you're new to franchising, business ownership or the industry you’re joining, you’ll benefit from a comprehensive franchise support package. Provisions vary for investors who take on franchise resale opportunities, so it’s important to find out exactly what the franchisor offers in terms of ongoing guidance.
4. Is the business in a good location?
Financial statements will tell you how the business is performing, but you can gain a deeper understanding of its potential by looking at the area’s population demographics, accessibility, visibility and transport facilities. You should also check to see whether the franchise unit has exclusive territory rights, preventing other franchisees in the same network from encroaching on your region.
If you’re looking for franchise resales in a specific area, you can find more tips for scouting out the best investment opportunities in our handy guide.
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5. Is the business overpriced?
The best way to get an accurate evaluation of a business is to consult an accountant, who will be able to confirm whether the company is overpriced, underpriced or valued appropriately. They 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 and liabilities and perform a cash flow forecast to predict its future value.
6. Is there a cross-default provision?
If you plan to buy more than one franchise unit under the same brand, it’s worth checking your contract for a cross-default provision. If this clause is included, it will allow your franchisor to default on all your franchises if just one of your businesses fails.
You can find out more about the legal aspects you should consider before agreeing to a franchise resale deal in our article on the topic.
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7. Is there any financial support is available?
Many franchisors have established relationships with banks and other official lenders, who may be able to offer you attractive loan options for your franchise resale investment. Find out whether the franchisor can offer you any financial support and whether they have expertise in franchise lending.
Your ability to secure a great loan will also depend on your credit history, so it might be a good idea to check your credit score before you explore your options.
8. Does the franchisor have any specific requirements for prospective franchisees?
Many franchisors are happy to accept diligent, ambitious investors who are ready to run and grow their own business under an established brand. But some expect franchisees to have a minimum level of experience in managing a business, and others only approve candidates with an industry qualification or professional accreditation.
Ask about the franchisor’s investor criteria to find out whether you fit the bill.
9. Is the franchise recommended by others?
Always check to find out whether a franchise is a member of the British Franchise Association (BFA), the franchise industry’s main regulatory body. If it is, the brand will uphold its high standards for ethical operations.
It’s also a good idea to get in touch with some of the franchise’s most successful franchisees to learn about their experiences working in the business. 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. They’ve got no reason to bend the truth.
10. What is my goal?
Aim to find out whether the business will be able to help you achieve your long-term goals. Many factors could affect your performance over a contract term, from franchise fees to the cost of supplies, marketing and customer retention - not to mention trends and changing consumer behaviour.
If you pursue the opportunity, make sure your business plan accounts for the best- and worst-case scenarios. Also, consider applying the SMART criteria - specific, measurable, achievable, relevant and timely - when determining whether franchise resales are right for you.
Get clued up on franchise resales
You’ll find lots of articles on franchise resales here at Point Franchise - why not continue your learning journey with our guide to the advantages of a franchise resale deal? Alternatively, use the search box to find other informative publications.
Alice Tuffery, Point Franchise ©