Buying a franchise is often represented as a safer route into business ownership, but it is still your responsibility to assess whether the information and projections a prospective franchisor is providing are correct and achievable. While it is a safer route, it still comes with challenges. As the owner of a new franchise territory, you’ll need to deliver the sales and profits needed to make your business a success, mirroring that of franchisees in the network.
So, how can you be sure that a franchise business will operate in line with projections? How can you be sure that a franchise business will perform in a particular territory? That’s where a franchise resale comes in.
Find out more: Looking for funding? Learn how to request finance for your franchise.
What is a franchise resale?
Simply put, a franchise resale is an existing franchise. It is already trading, and someone has already invested in it. It could be relatively new, or it could have run for several years. That means the franchise will already have a market presence, customers, cashflow, premises and other features in place, so you can take over and grow it further.
As the new owner, you will still receive support and training from the franchisor, who will also assist with the transition between you and the previous owner.
Why buy a franchise resale?
There are many benefits of buying a franchise resale in the UK. While there is less risk in launching a new franchise compared to a start-up, buying an existing franchise eliminates even more risk. Some of the benefits include:
- You won’t need to get the franchise off the ground
- There is potential for accelerated growth
- Established infrastructure (methods, systems, marketing, equipment, staff)
Find out more: Still not sure which franchise you should invest in? Learn how to choose the right franchise.
How do you buy a franchise resale?
What should you look for when taking over a franchise resale? How can you be sure the business is sound? Why is it being sold – is there something wrong with it?
You should ask these types of questions and expect clear, concise answers from both the franchisor and the selling franchisee.
Before making your decision, make sure you understand the key elements of buying a franchise resale:
The information memorandum
The selling franchisee should produce a detailed prospectus of sale (sometimes called an information memorandum) that provides you with all information about their business necessary to help you decide whether you are interested or not in acquiring it. This prospectus is not about the entire franchise opportunity. It only covers details about the specific existing business you might buy.
Other than sales turnover levels and profit figures shown in the trading accounts - which should be up to date - the amount and type of information contained in a prospectus will vary according to business type.
The prospectus should also contain a description of the location/territory and the marketplace in which the business operates. And it should explain why the owner has put the business on the market.
Valuing a franchise resale
The business will naturally have an asking price attached to it which should bear a close relationship to the levels of pre-tax profit it generates. Regardless of this asking price, it is crucial that you conduct a valuation of the franchise yourself (or use an accountant).
There are various ways to arrive at a ball-park valuation, but most accountants will apply a multiple of pre-tax, pre-drawings. That said, business valuation is not an exact science. Its purpose is to give a reasonably accurate idea about where negotiations on the final price should begin, and more than just a profit multiple will decide what is eventually paid.
Negotiations
Negotiation is a delicate and often frustrating part of any sale or purchase because the buyer and seller have conflicting goals; each participant wants to get the most out of the situation.
As the purchaser, you need to prove that you can exceed existing performance, make enough money to cover the asking price, and of course, make a profit. The seller must clearly demonstrate what the business can deliver, and the capacity of the marketplace to accommodate its potential. Sellers should also be mindful that you may be considering more than one opportunity.
Negotiation is about compromise, about give and take and seeing the position from the other’s perspective. Hardball play from either party simply ends in frustration and failure.
That said, negotiations are mostly friendly affairs with both parties knowing there is a mutually beneficial goal in sight: agreement. If one side thinks they could have gained a little bit more and the other side thinks they paid a touch too much, then the deal is probably at just about the right level.
Completion
Any business sale requires a legal completions process and franchise resale transactions are no different. With a franchise resale, however, there are three parties involved: the seller, the purchaser and the franchisor.
In a franchise resale, the rights to use the business name, logo and business model remain with the franchisor, so they must always approve the terms of the sale of one of their businesses.
You get the best out of a resale opportunity when the seller follows a structured process to furnish necessary details in preparation for their sale.
Based on the information provided, prospective buyers should have a reasonable idea of the business’s growth potential and the level of finance needed to launch their ownership and be able to prepare a structured business proposal to present to banks.
While the franchisor will probably engage an external specialist to coordinate and manage their resales, they should still be able to advise you on the best way to grow and develop the opportunity you are considering. They will also help you structure a marketing launch plan, and many will have a template plan in place to launch a business resale.
This means a franchise resale is still rooted in the basic franchising concept: where an experienced franchisor and an enthusiastic, qualified franchisee have all the ingredients to be highly successful.
If the sale of an existing business is well organised and structured, it truly can be a win-win-win situation for the franchisor and both the outgoing and incoming franchisees.
Explore franchise resales
Buying an existing franchised business is a logical and practical way to join a franchised network. As with all things franchising-related, a structured and detailed approach is best and acquiring an existing operation will set you well on your way to business success.