Why buy a franchise resale?

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Franchise resales - what you need to know

If you're considering buying a franchise resale, there are a few things you need to consider before you sign the franchise agreement. Whether it’s a well-known, international franchise, or a small, up-and-coming franchise, you’ll need to think long and hard about whether the resale is a good investment. Here, we take a look at why you should consider a resale and what you need to think about before you go ahead with the purchase.

Why are there franchises for resale?

  1. The current franchisee wants to relocate.
  2. The current franchisee is retiring.
  3. The current franchisee is going through a difficult time, e.g. personal illness or illness of a loved one, and they can no longer fully commit to it.
  4. The current franchisee wants to focus on a new business venture.

Why buy a franchise resale?

  1. Become profitable much sooner. Setting up a new franchise unit involves a significant investment and costs you might not have even considered. The overall initial investment of a franchise resale should be lower, as it has already established brand awareness and a team of skilled employees. Therefore, you should breakeven much sooner and start making profits in a shorter timeframe.
  2. It exists in a favourable territory. One of the main reasons many people consider buying a resale is that it covers an ideal territory. It may be the perfect territory because it’s close to home, or because it’s a region you know well. It might particularly suit the type of industry you want to enter, or it might depend on certain resources or other businesses that are only available there. Whatever your reason, it's important not to get too fixated on a franchise just because it's in a good area. Everything else has to line up too. There’s no sense in buying a well-located resale if you don’t have the necessary skills to run it.
  3. It is fully staffed and operational. Resales can also prove a good buy because they’re already fully staffed and completely operational. This is a particular bonus if you find out that you get on well with the team in place and don’t need to make changes. Finding the right employees, training them and getting them operational experience can take a lot of time and effort, so it’s understandable that so many potential franchisees find the idea of a fully staffed franchise so enticing. However, franchisees also need to be aware of the fact that their new acquisition may not be optimally staffed, and changes may be required.
  4. It already has an established customer base. Finally, franchise resales are an attractive proposition because they’ve already had time to establish regular clients and an extensive market presence. This means fewer resources need to be devoted to marketing and advertising, allowing time, money and labour to be diverted towards ensuring high standards of service are offered to every customer. An extensive client base is typically a good thing, but prospective buyers do need to consider the possibility that the franchise's existing reputation may limit the number of new customers you can attract. It may be the case that the previous franchisee caused irreparable damage to the franchise’s reputation, from which it won’t be possible to recover.
  5. You can concentrate on the growth of your franchise. With everything already in place (i.e. team of employees, suppliers, loyal customer base), when you buy a franchise resale you can focus on the growth of the business. Instead of spending time and resources on getting the franchise off the ground, they can be spent on making plans for the business’ future. If you’re starting a business from scratch, it can be difficult to distinguish its strengths and weaknesses. This, of course, isn’t the case with franchise resales, where you can take a strategic view of the business. Franchise resales are a good for ambitious entrepreneurs who want to be the best at what they do. There is scope to become the most successful franchise unit more quickly than a new franchise location.

What you need to think about when buying a resale

1. Why is it being sold?

The most important question to ask yourself with any franchise resale is: ‘Why is it being sold?’ In the vast majority of cases, it will be a completely legitimate reason. Maybe the former franchisor is retiring, or they want to start up their own franchise. Perhaps they're moving to the other end of the country and will no longer be able to run the franchise. It could be that it was always their plan to quickly sell the franchise once they had established it as a competitive business.

However, it’s also possible that the resale is occurring due to poor performance or something equally concerning. Many franchises are sold on because they’re simply not profitable enough, others because the franchisee hasn’t received the support they need from the franchisor.

In some cases, the exclusive territory may have been poorly drawn up, and there's not sufficient business to keep the franchise alive. Whatever the reason, it's vital that your desire to become a franchisee doesn’t override potential warning signs.

2. Do you bring anything extra to the franchise?

With franchise resales, it’s also important to ask whether you’re going to bring anything extra to the franchise. What ideas do you have for its future? Do you intend to make any changes? If so, what impact are they likely to have? As you consider making the purchase, don’t forget to recognise the fact that you will be moving into a long-established team that’s always been organised by a single individual. How is your leadership going to change this? Could your changes have a disruptive effect?

When it comes to working with an established team, you need to make sure that your contributions are going to be constructive. Employees will be used to doing things in a certain way and – though change isn’t always bad – coming into a business and radically altering the way it operates may not be as effective as you imagine.

3. Is it the right franchise for you?

As well as considering whether the territory and franchise unit are right for you, potential buyers also need to consider the relationship with the franchisor. Are you entering into an agreement that benefits you both? Can you see yourself working closely with the franchisor? Is the franchise a good fit and is it where you want to be? Though everything else may be perfect, if the franchise isn’t right it’s going to be difficult to make a success of your business.

4. Have you done your due diligence?

Finally, it’s essential that you carry out your due diligence. Whether you’re looking to buy famous franchises or complete unknowns, every franchisee should perform due diligence. Not only will it give you an indication of whether the business is financially viable, but it will also offer some insight into whether you're a suitable franchisee.

Conclusion

Resales can be a fantastic opportunity for the right buyer. However, franchisees need to be sure that they’re making a good decision before they sign up. There are a variety of reasons the franchise may be up for sale and an enormous number of things that could go wrong with a resale. Franchisees also need to understand that they’ll be compared to the previous owner for a long time before the franchise becomes truly theirs. Despite this, if you think you've got what it takes and have done your research, a resale may be the ideal way to become a high-flying, successful franchisee.

Franchise re-sales offer so much more than simply being another franchisee’s cast-off; they are a great opportunity with a rapid route to profitability.

How can I value a franchise resale?

If you’re an existing franchisee looking to sell your franchise location, you might be wondering what the best way to go about it is.

Firstly, you need to analyse how successful your business really is. Valuation should be relatively simple if your business has a track record of success. To start the process, use your financial statements to find out your net cash flow. To work out this figure, take the business-related expenses away from the profit generated. This is then multiplied to determine the value of the franchise unit.

To work out how many times it’s multiplied, you need to take the stability of the cash slow and the forecasted growth into consideration. A profitable business would be valued between two and five times the net cash flow.

These valuations are never exact, and you need to discuss expectations of the franchise with the franchisor. It’s also a good idea to consult an independent franchise specialist wo can offer impartial advice and guidance during the negotiation.

Remember

The price of a franchise resale is often higher than that of a new franchise location. The higher amount is usually because it has an existing customer base, existing orders etc.

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