Investigating a franchise resale
Though there are many differences to buying a new franchise versus buying a franchise resale, the research into both opportunities should be as thorough.
Don't be fooled into thinking that because a resale is an existing business that the research has already been done for you, this is a common mistake made by many. For one you don't know how thorough the existing franchisee was when he/she bought the franchise in the first place and also what changes have taken place since then. This is why it is not only vital that you undertake thorough research into the business but you also seek professional advice from an accountant and lawyer. Equally as important is the need for both to specialise in franchising; only franchise experts will be able to identify potential problems and concerns and translate this back to you. Though this may incur high initial costs, this is nothing compared with the cost of business failure in the long run which is a realistic possibility if you do not seek the right professional help.
To help with your research we have listed below some areas of consideration; understanding these will be imperative to your investigation of franchises for sale.
Firstly, it is vital that you uncover the real reason for the franchisee wishing to sell their business. It could be that they simply wish to retire, relocate or have to sell due to personal reasons but on the other hand it could be something else that affects the future of the business. This is when it is vital your research is thorough. Speak to your local government and other local business owners to check that there are no proposed plans for local development that could affect the business e.g. new pedestrian walkways, competition moving into the area, closure of shops/shopping malls, transport route changes etc.
What about the franchisor, are they ethical? Is the franchise company being run correctly? Are there any new developments taking place which may not be favourable due to additional costs e.g. rebranding of the business? You need to investigate both the franchisor and the franchise. As well as speaking with the franchisor, speak to other franchisees; this is your best source of first-hand information on the credibility of the franchise. Are they happy? Are they making money? What concerns, if any, do they have about the business and the direction the franchisor is taking it in?
A major advantage when buying a resale is the amount of useful information available to you e.g. existing financial accounts and records of trading history. Use this information to your benefit. Find out how the business is performing and how much money the franchisee is actually making. And consequently, is the valuation of business correct? And how does it compare to similar businesses for sale? This is when it is essential that you take advice from accountant. Ask them to look over the records and relay back to you what the figures actually mean.
You need to also understand what the total cost of the franchise is and what you get for your money. Find out exactly what is included in the price – stock, fixtures, equipment etc. Equally turn the question around and ask them what isn’t included.
Remember you are buying an ongoing concern and so are responsible for any liabilities the franchisee has. A lawyer and accountant should be able to unearth this information for you.
Find out what the outgoings are including ongoing fees to the franchisor. It may be that you can afford the purchase price, but can you afford to keep it running i.e. what working capital is needed? This is very important and is often overlooked by many. Be realistic when looking at this figure; over-estimate rather than under-estimate.
If the figures show that the business is underperforming you need to identify why this is. Does the franchisee admit that they have lost interest in the business and as a result have seen their sales drop? If this is the case, can you turn it around? Or are outgoings too high? And if so, can they be reduced? Or do other franchisees lead you to believe that it is a company-wide issue, and if this is the case, is it a business you want to be part of?
Another reason for a business under-performing could be your potential market. It is therefore vital that you undertake market research and speak to locals/potential customers as well as local businesses. Are the demographics right for your business? What competition exists? And what benefits have you over them and vice versa? Is the market saturated or does a market still exist for the business to thrive in? Are there any proposed planning developments for the local area that could affect the business?
As well as the areas above, you should also read our step-by-step guide to buying a franchise.
Research, research, research is the key to making sure that you buy an ethical and profitable business opportunity.
Got a question to ask?
Steve Seddon - Westpac
Steve is a Senior Business Development Manager with Westpac. He specialises in the franchise sector and is on the FCA's Western Australian Committee.
Tim Kilham - Lanyon Partners
Tim is a director of Lanyon Partners Chartered Accountants and heads up the franchising area of that division.
Alan Branch - Optivance 360
Alan is an experienced consultant, commercial lawyer and franchise expert recognised for his skill in negotiating and completing business set up and expansion projects.
Vicki Prout - Sherpa Group
Vicki has been involved in the franchising sector as a Franchisor, Franchisee, and Consultant. She is currently an international consultant guiding businesses through their franchising journey.
Robert Toth - Wisewould Mahony
Robert has over 25 years of experience as a business lawyer and consultant. He writes regularly in franchise and industry journals and is a recognised leader in franchise law in Australia.