Home news What are franchise resales & are they a good investment?

What are franchise resales & are they a good investment?

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Franchise resales are an existing franchise business in a local area seeking to sell. There are many reasons why franchises are resold. The current owners could have reached retirement age or decided that the time was right to move on and try something else. It could be as a result of illness or other personal circumstances.
The bottom line is if you are considering buying an existing franchise is to find out why the resale is available. This will be the main indicator as to whether it is the right match for you. Of course, this could be very different for each individual franchisee, with some relishing the challenge of taking a struggling enterprise and turning it around through hard work and organisation.
Either way, in many circumstances there are many advantages of owning a franchise that’s already up and running.
Advantages of a franchise resale
There are numerous benefits of taking over from another franchisee rather than starting from fresh. A resale represents an opportunity to invest in not just a proven concept but one that is bringing in revenue, with staff and premises already in place. There is usually an existing customer base and an established place in the market.
Promotional materials may already exist, equipment and accounts will be in place and there is often no need for any further staff training.
Both franchises that have been performing well and those that have caused problems for previous franchisees have their advantages. If the business is doing well and being sold for personal reasons, then you already know that it can be profitable and successful. Those that are struggling are often available at a better price for that very reason. But it is always worth establishing what kind of shape the franchise is in before you make a purchase.
Questions you need to ask
In order to establish the exact position of the current franchise, there are several key things you need to know.
You need to establish the exact reason the business is being sold. Find out the reasons for the sale, if possible from the current franchisee. Then you need to see how well the franchise has been performing over the last two years. Get an account of this from the franchisor and also from the franchisee. Compare and contrast the two and if there are any discrepancies, ask why.
Try and look for trends in the accounts and understand the reasons why they might happen. Are there any particular times of year when sales went up or down? Is staff turnover high and if so, why?
Another very important question concerns the lease. Is the business secure in its current site or is the lease expiring soon? Will there be any conditions regarding the continuation of the lease or renewing it, should you need to do so?
You should also instruct your solicitor to ask if there is anything that has not been disclosed to you. This should be included in the purchase contract so that you are protected against any misleading information or omissions.
The answers to all of the above questions will have a significant impact on your decision to go ahead with your purchase or not. Make sure that you do all your due diligence and get satisfactory answers from both the franchisor and franchisee. That way you protect yourself from getting a one-sided account of the business and reasons for its sale.
How to calculate the costs of a franchise resale
The average price of the franchise should be roughly two to five times the net cash flow number. You can produce this by taking the net income and adding back any expenses that you deem unnecessary, such as high salaries, company cars and more.
The more stable the cash flow over the years, the more valuable the franchise will be. However, for businesses that are not performing so well, using this method is not as easy.
The current owner will often have many reasons why the business is not performing so well, but is up to you to determine which of these are true and which are being exaggerated. If you are convinced a change of ownership could work, it might still be worth making the investment, but always try and negotiate a better price.
Remember that when you buy a resale there are advantages as well as drawbacks. Any equipment that you might purchase may not be new or in the best working order. Premises might need an overhaul too, which can be very costly. All of this should be taken into account when agreeing a price.
Negotiating
As with most negotiations, the buyer and seller will probably have different opinions about the value of the business. Each wants to get the best deal. Negotiating is about compromise and being able to see at least some of the other points of view. Playing hardball very often ends in frustration for both parties, so be willing to give and take.
Completion
As with any business sale, there is a fair amount of legal documentation that requires processing. As there are three parties involved – the seller, the buyer and the franchisor – this can make things a little more complicated. All three parties must approve the contract before it can become legal.
If you are looking for a business with cash flowing in from day one, trained staff already in place and a presence in the local market established, then a franchise resale could be a good option. Having known data makes it easy to set targets and it may even be easier to get funding. Developing a business in a new territory can be very demanding, so removing that aspect from your business plan might be a good idea.
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Source: Franchise UK