Why buy a franchise resale?


Why buy a franchise resale?

The fact you are reading this article suggests you are one of the many people to have absorbed some of the well-publicised statistics about the success of franchised businesses versus independent ones.

For this reason the main banks involved in funding franchisees and franchisors are more likely to lend and offer more favourable terms to purchasers of franchised businesses than to independent start-ups. 

In a nutshell, the funding proposition is based upon a tried and tested business model, so there is less risk involved for the banks.

Although a franchise acquisition is generally less risky, it is of course still up to you, the purchaser, to assess whether the information and projections your prospective franchisor is providing are correct and achievable.

You must be sure you can implement the marketing programme, deliver the sales and profits needed to make your business a success mirroring that of other franchisees in the network. 

How, then, can you trim the risk element even further? How can you be sure that a particular business will operate in line with the projections? How can you be sure of how the business will perform in a particular marketplace?

The solution is to purchase an existing franchised business – known as a franchise resale – rather than starting from scratch. An up-and-running business will already have a market presence, customers, cash flow, premises and all other rudiments in place, so you can take over and drive it onwards.

Of course, the franchisor is still there to provide training and support, assist with the transition between owners and provide hands-on advice, just as with a new franchise. 

Most franchisors will have franchisees in their network who have decided they want to put their business on the market. Franchisors won’t openly advertise the locations for sale because most franchisees wouldn’t like their exit plans to be general knowledge.

They will, however, discuss them with you, confidentially, once you have passed the franchisor’s initial approval stage. You can then decide whether to opt for a new location or to take over one of their existing franchises.

The answers you receive in relation to a franchise resale should be more reassuring than for an independent business because you have the franchisor to corroborate information

So what should you look for when taking over a franchise resale? How can you be sure the business is sound? Surely it is more expensive to buy an existing business than starting up from scratch? And why is it being sold – surely there’s something wrong with it? 

This of course is not the case. All these questions you would be wise to ask and entitled to expect clear, concise answers from both the franchisor and the selling franchisee.

But these are also questions you would ask the seller of a non-franchised business. It is not about being more or less diligent with your enquiries, but the answers you receive in relation to a franchise resale should be more reassuring than for an independent business because you have the franchisor to corroborate information.

They cannot guarantee the information, but they will know a lot about the particular business and certainly have a view on its performance and potential. 

Resales: advantages over starting a new franchised business

  • Brand established in the local marketplace
  • Cash flow from day one
  • Readymade customer base
  • Trained staff already in place (if applicable)
  • Existing property (if applicable)
  • Established supplier network
  • Evidence of what can – and has – been done
  • Opportunity to develop business further      

Key elements of buying a resale

Information

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 franchise opportunity as such; you will acquire information about the franchise package from the franchisor while you go through your interview and fact-finding process about which franchise network to join. Instead, the prospectus details the specific existing business you are considering buying.

Other than sales turnover levels and profit figures shown in the trading accounts, which should of course be up to date, the amount and type of information contained in a prospectus will vary according to business type. For example, a premises-based franchise like Minster Cleaning Services will have a prospectus containing details of staff, equipment, premises, etcetera, while a Countrywide Signs franchise will cover details of staff and equipment, and a single-person Plan-It Cards greeting cards distribution business will be simpler still. 

 

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.

Some franchisors will assist their franchisees in writing such a document. Others will introduce them to third-party advisors such as Franchise Resales Ltd (www.franchiseresales.co.uk).

Valuation

The business will naturally have an asking price attached to it which should, in most cases, bear a close relationship to the levels of pre-tax profit it generates. An enlightened franchisor will have assisted the franchisee in arriving at an asking price, but the best advice for the franchisee is to obtain a franchise specialist’s independent view as opposed to asking the franchisor or their accountant to value the business. The logic behind this is as follows: you as the prospective purchaser will use an accountant, who will arrive at a comparative value, so if the seller also takes independent advice, the chances are both valuations will be fairly close. Thus, the gap to be bridged through negotiations will be smaller than it otherwise might have been. 

There are various ways to arrive at a ball-park valuation, but the majority of 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. 

Negotiation

Negotiation is a delicate and often frustrating part of any sale/purchase because the buyer and seller have conflicting goals; each participant wants to get the most for what they have to offer.

As the purchaser you need to believe you can better the seller’s performance and make enough money to cover the asking price and any other costs and of course make a profit. The seller must clearly demonstrate what the business can deliver and the capacity of the marketplace accommodate its potential. And they should be mindful that the buyer may be considering more than one opportunity, so should beware of engaging in brinkmanship.

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 very 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.

And yes, the franchisor has an interest in the transaction so should be a party to the final sale and purchase agreement. In a franchise resale the rights to use the business name, logo and knowhow remain with the franchisor, so they must always approve the terms of the sale of one of their businesses.

Enlightened franchisors will provide a pro-forma sale and purchase agreement for use by selling franchisees, to avoid writing agreements from scratch for every business sale and thereby incurring excessive solicitors’ fees.

You get the best out of a resale opportunity when the seller, with help from the franchisor or a specialist resales consultancy such as Franchise Resales Ltd, 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, combined with an enthusiastic, qualified franchisee, has 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.

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.

About The Author

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Derrick Simpson 
Derrick Simpson is co-founder of Franchise Resales, experts in the process of selling and purchasing existing franchised businesses.