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What You Need to Know About Buying an Existing Franchise

By: Bill Bradley

 

What You Need to Know About Buying an Existing Franchise

Purchasing an existing franchise is what’s known as a franchise resale. Many entrepreneurs are attracted to these types of sales because you can buy into the franchise for a lower price than if you were to start from scratch with the brand.

Although it’s easy to get excited to inherit someone else’s good fortune, there’s also a chance you could be welcoming their bad luck. Remember, just because you’re getting the franchise business for a better price, doesn’t mean it’s a bargain.

In some instances, the business is doing great, but the owner is retiring and none of their family members or friends want to take over. Other times, they’re looking for an out because they weren’t able to keep the business afloat on their own.

Either way, if buying an existing franchise is something you’re seriously considering, it’s important to figure out if you think the franchise business will perform well under your ownership.

Things to Consider Before Buying a Franchise Resale

Do your due diligence; get a full understanding of what the business is worth and every aspect of what you’re buying. Here’s what you need to consider before signing the agreement:

Find out why the owner is selling their franchise business.

First and foremost, you have to ask why the original owner is selling their franchise business. Is the reason feasible? Reviewing their books and sales records will give you a good idea of what to expect and what you’re working with if you decide to move forward with the sale.

Even if the numbers are bad, figure out if you have the grit and business sense to turn profits from the red to the black. If the numbers are good, you’ll get the benefit of starting a business where you can hit the ground running. Purchasing a successful existing franchise business means you’ll already have a customer base, vendor relationships, trained employees – and possibly – positive cash flow from day one.

Examine the franchise business’ employee culture.

If the employees are happy and well-trained, this will bode well for business. On the other hand, if they’re disgruntled or have a strong relationship with the current owner, you may face backlash.

If you decide to move forward with the franchise resale, your employees will be your teammates. After all, they are the ones handling day-to-day operations and dealing directly with the customers.

Analyze the current industry and demographic trends.

Ask yourself if the business can continue to survive in today’s current market and beyond. Do you think you can sell the product or service to today’s consumers? Are the demographics changing in the surrounding neighborhood in a way that could affect your business? We can’t say enough: Research. Research. Research.

Get in contact with the franchisor and establish a relationship.

After getting the information we spoke about, you should also do a deep-dive into the franchisor’s history as if you were starting from scratch. That means going through franchisee validation, examining their support and training systems, and more.

Find out if they want you to take over the existing agreement or agree to new terms. Do you need to account for additional costs, like a transfer fee or bringing the location up to current standards/branding?

Most importantly, you should ask the franchisor to confirm the information you received from the original franchise business owner. Veteran Franchise Consultant, Jeff Elgin, spoke to this in an Entrepreneur article about franchise resales, “They won’t want to do this, because they don’t want the legal liability, but they also don’t want you to join their system under false pretenses.”

Elgin goes on to say not to be surprised if the franchisor wants to see how much you’re paying for the business. All they want to know is if you have the capital and experience to succeed. If you can’t succeed, there’s no point in bringing you on as a franchisee.

Need more help on what to ask a franchisor? We wrote a blog about it here.

Ask the owner if there’s any pertinent information they may be leaving out.

This seems obvious, but if the original owner is looking to make the sale, their pitch might not have your best interest in mind. Protect yourself by being straightforward; ask if there’s anything that could affect your business that you may not know about.

A good example of this is an upcoming street closure or construction that may block customers from seeing or wanting to visit your business.

Final Thoughts Before You Go…

Your aim during a franchise resale is to own a business with proven systems for a bargain. Make sure to negotiate the sale price, and if you’re lucky, training costs, payment terms, and more.

And this may be the most important advice we give you: Consult with an experienced franchise attorney before signing a purchase agreement or any other franchise documents. Wondering why? Read our blog about the importance of hiring a franchise attorney.

Published: July 1, 2019
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Source: America's Best Franchises

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Bill Bradley

Bill Bradley

Bill Bradley is founding member and CEO of America’s Best Franchises, LLC.  Bill founded three financial services firms, Ocean Shores Ventures, Denali International and William Bradley Enterprises. In addition, to launching America’s Best Franchises in 2005, Bill orchestrated approximately 20 private equity transactions in excess of $31 million, and launched five specific purpose private equity partnerships.

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