There is another option to starting a franchise business in Australia other than investing in a new one. Have you considered buying an existing franchise, otherwise known as a franchise resale?
Franchise resales are in abundance, and it may be very worthwhile looking at this option. However, you need to remember that you need to put in the same amount of due diligence, attention and research that you would put into buying a new franchise.
There are many existing franchisees in Australia looking to sell their franchise, and there are many justified reasons for doing so.
- Many franchisees plan ahead on selling their businesses once they can make them profitable; this is their exit strategy from the start.
- The franchisee may be retiring or moving away
- Once in the business, some franchisees decide that it’s not the right choice for them and want to move onto to something else.
- The franchisees personal circumstances may have changed, such as ill health, or the death of a loved one, and they may no longer be able to cope with running their own business.
Buying a franchise resale in Australia is becoming more and more popular as it is often seen as a safer option to starting your own business from scratch. There are many advantages such as:
- It’s an existing business with and established customer base, and a local reputation
- Starting from scratch means zero customer base, and a not yet recognized business
- As an already established business it has a trading history showing potential income, and allowing profits to be generated at an early stage
- As a new start business, there is no history or reputation in the community, and only a speculative guidance on earning potential, with only the possibility of reaching a profitable stage
- An existing business gives you a guaranteed income from day one
- A new business can take some time to get off the ground and may not make any money for quite a while
- With a resale the business already exists
- With a new franchise you will need to find a location, build out the site, purchase furniture, equipment & signage, find vendors and supply inventory, hire & train employees etc, etc, etc
- There is easier access to finance with a resale franchise, as banks like the fact that they can base their lending decisions, not only on the franchise system and your suitability, but also on the trading history of the operating location, making it easier to make financial projections
- A new franchise will be scrutinized more by the banks, as they will have to be convinced it’s the right location, with the right customer base, and sometimes they may not lend as much as they would do on an existing franchise as there is no trading history, which is a huge factor
- With an existing franchise you will be starting with trained staff
- With a new franchise it takes time to find & train the right people, costing more time and money
- An existing business with have established suppliers
- A new business will have to try out different suppliers before they find ones they are happy with
- In a resale franchise you know the true cost as the business purchase is based on the asset base, its cash flow or some other agreed term or condition.
- In a new franchise the franchisor will provide information in their Disclosure Document which at its best is only an estimate of costs to develop your new franchise business
What are the disadvantages to buying an existing franchise?
You have to bear in mind that when you buy a franchise resale in Australia it can sometimes cost you more as you will be buying the goodwill of the business. You will still have to do your homework when purchasing a resale, even if it looks a sound profitable offering, you’ll need to dig from more information.
It is important to remember that when buying a franchise resale, you are not always going to be buying a successful business without problems. You must research this fully and your first question should be “Why is the franchisee leaving the business?”
Take into consideration also the fact that the existing franchisee may have old premises and equipment, which may have to be modernized and replaced.
Will the employees be staying? If you’re counting on having staff trained and ready you need to be sure they will stay.
Are the market trends or neighborhood changing? Are competitors coming into the market that may affect the future performance of the business?
Make sure there are not going to be any new developments or road constructions that will have a negative impact to your business.
Check the location out as if you were starting afresh. If the franchise business has been on a decline there is no guarantee you’ll be able to turn it around. Just because you think you’ll work harder than the prior owner doesn’t mean you’ll perform better!
And sadly, some franchisees will have simply lost heart and allowed their business to deteriorate. Turning this around and winning back former customers can be very difficult.
How to value a resale business
The goodwill of the business and its assets are what the sale and purchase is based on. The value of the assets is based on their realisable value, in other words, what the assets could be sold for in the open market. Goodwill on the other hand is based on the future profit potential of the business.
The price is the amount that a willing buyer will pay to a willing seller. This is often a multiple of the business profit but getting to the right multiple is the skill and will vary from industry to industry.
When purchasing a resale the investor should expect to recoup their initial investment together with a return, based on the increased value they achieve for the business during their period of ownership. A starting point is to look at the return on investment; if you are looking for 20% (to reflect the risk of investing in the business) then this would equate to a multiple of 5 times profit (i.e. you might invest $200K for a return of $40K).
It’s never quite as easy as this in practice. It’s best to seek help and advice from an experienced accountant who will look at various factors of the business to work this out such as, the maturity of the business, its dependence on key customers or staff, the assets employed and so on.
Legals
When purchasing a franchise resale you will not necessarily receive the same disclosure document from the franchisor as you would normally receive if you were a new franchisee. As you will be purchasing a franchise resale, you will be assuming an existing agreement without modification. The franchisor may not necessarily need to provide you with a pre-sale disclosure as you will be signing a transfer of the seller’s agreement.
If, however, the franchisor is offering you a different agreement to that of the existing franchisee, you should also receive a copy of the franchisor’s disclosure document. Make sure you study this new franchise agreement and disclosure document very carefully as it may contain very different fees and terms from the original agreement signed by the seller of the franchise business and could impact the worth of the business considerably.
Please beware! It is of the outmost importance that your legal documents are examined and explained by an attorney with franchising knowledge as only he or she will be able to provide you with the correct guidance and advice. Although it may be tempting to have your house closing attorney look over this as it may be less expensive initially, the reduced legal fee may prove to be very expensive to you later on. It is critical that your attorney has the working knowledge of the franchise rules to be able to protect you properly.
Buying a franchise resale can be a fantastic business start up opportunity for you, but you need to make sure that you do your homework first before you part with your hard earned dollars!