Prospective franchisees can choose to open a new franchise location or buy an existing one. Purchasing an already existing franchise might be less common, but it’s worth considering. It could be an opportunity to get a great deal on a business that’s already up and running!
It’s important to note that resales are a normal part of the franchise lifecycle, and it isn’t necessarily an indication of a distressed business. A few types of franchise resales include:
- Fixer Upper – As the name implies, this is a franchise that is not thriving and will require the new owner to invest time and money into turning it around.
- Cash Cow – This refers to a successful franchise with a large cash flow, which also means that you will have to pay top dollar to acquire it.
- On-Track Business – This type of franchise is a growing business that comes with significant upside potential. The reason for selling isn’t because the business is suffering, but for some other reason (family matters, being called to active duty, etc.).
If you’re considering franchise ownership, then you’ll need to decide between starting a new franchise or buying one that already exists. While both options have unique benefits, anyone who buys an existing franchise should complete extensive research and understand the ins-and-outs of the franchise before making a purchase.
10 Things You Should Know Before Buying an Existing Franchise Business
1 – Speak With a Franchise Consultant
A franchise consultant is your one-stop-shop for resources and guidance related to buying a franchise. If you’re trying to decide if buying an existing franchise is a good idea, a FranNet franchise consultant will provide you with the information you need. Furthermore, their services are free to you!
2 – Understand the Franchise Disclosure Document (FDD)
The FDD is a legal document that provides key details to help prospective franchisees make an informed decision. It sets clear expectations regarding the terms, costs, and obligations associated with the franchise opportunity. Some of the information outlined in the FDD includes:
- Franchisor information
- Initial investment and other fees
- Training and support
- Franchisee obligations
- Renewal and termination
- Financial performance representation
- Contracts and agreements
- Financial statements
It’s important to fully understand the FDD before committing to join a franchise, so it’s worth hiring a franchise lawyer to review it with you.
3 – Review Transfer Requirements
To avoid complications, it’s important to follow any requirements for transferring the franchise to new ownership. You should also make sure there aren’t any restrictions that would prevent you from buying the franchise. An example of a potential roadblock is the “Right of First Refusal”, which allows the franchisor to buy the franchise back instead of offering it to an outside buyer.
4 – Determine Business Value & Review Financial History
Before buying an existing franchise, you should conduct an objective appraisal to determine the business’s viability. A few factors to consider include:
- Business goodwill
In addition, you should review the following details from the franchise’s financial records:
- Income statement
- Balance sheet
- Cash flow statement
- Profit and loss statement
- Outstanding debts
Completing a business valuation and assessing the franchise’s financial standing will help you decide if you want to buy the franchise, and it will give you information you can use to negotiate the opportunity.
5 – Inquire About the Current Franchisee & Franchisor
It is helpful to understand the circumstances behind why a franchisee is selling their business. If it’s for personal reasons like a divorce or other unexpected hardship, then you might not have anything to worry about. However, some red flag reasons include:
- Downsizing in the industry
- Business is failing
- Low quality products or services
- Conflict with the franchisor
Furthermore, you should assess the franchisor’s reputation. Consider speaking with other franchisees to learn more about the brand and their relationship with the franchisor. You can also read the company’s mission statement to ensure that you align with the franchise’s vision.
6 – Evaluate the Level of Franchise Support
Support is a unique benefit to buying a franchise vs. starting your own business from scratch. If you are going to buy an existing franchise, then you should know what to expect in terms of franchisor support. Make sure you thoroughly review the franchise agreement, and ask questions regarding:
- Policies & procedures
- Administrative support
- Financial assistance
The more informed you are about the franchise, the better decision you can make!
7 – Discover How the Franchise Location is Perceived
A franchise brand as a whole might be well-liked while specific locations have bad reputations. You might want to avoid buying a franchise that is known to serve low-quality food, have poor customer service, not maintain a clean environment, etc. You can check out reviews from the local community to get an overall assessment.
8 – Employ Professional Help
Most people planning to buy a franchise aren’t legal experts or accounting professionals. Even those who are proficient at managing and growing a business find success because they outsource certain elements. When it comes to buying an existing franchise, hiring a franchise attorney and accountant is crucial to helping you make a good decision. An accountant can explain the financial status of a company while an attorney will review the legal documents and agreements before you sign them.
9 – Negotiate the Purchase Price
If you’ve done your research, then you will know how much you’re willing to pay for the franchise. You may need to negotiate with the seller to get the price you’re looking for.
Part of negotiating the purchase price also includes deciding who will pay the transfer fee, which is either a flat rate or a percentage of the transfer cost. The fee covers the transfer process, which includes the franchisor evaluating and getting to know you as the new franchisee.
10 – Sign Transfer Agreement
You are ready to sign the transfer agreement once you’ve completed thorough research and sought advice from experts in the field (consultant, attorney, accountant, etc.). Make sure you fully understand your rights and responsibilities under each clause of the agreement before signing it.
The Advantages of Buying an Existing Franchise Business
While buying an existing franchise isn’t for everyone, there are several advantages to consider:
- Established Customer Base – You’ll get to inherit a customer base from the franchise you purchase. Instead of starting from scratch, your main goal will be to retain those customers while working to expand your reach.
- Proven Business Model – Franchise ownership is already beneficial because you’re buying into a proven business model. Even better if you’re able to take over a franchise location that is already succeeding in its specific territory.
- Immediate Cash Flow – Since the franchise has already been running, you can start doing business from day one. You will have a system in place, a base of customers, a list of vendors, trained employees, and cash flow to keep everything running.
- Easier Financing – Buying an already successful franchise location looks less risky to lenders, which might make it easier for you to obtain a loan.
- Built-In Staff – You will also get to inherit a trained staff that is already experienced with the ins and outs of the business. As the new boss, you might make decisions regarding staff retention, but it’s helpful to have people in place who already know how to run the business.
- Negotiable Purchase Price – When starting a new franchise location, there isn’t much room for negotiating the purchase price. However, everything is up for negotiation with an existing franchise operation, which gives you the opportunity to land a deal!
While the advantages mentioned offer compelling reasons to buy an existing franchise, it’s crucial for potential buyers to discern the reasons behind the sale. If the franchisee is selling due to challenges in the location or lack of support from the franchisor, it might be wise for the buyer to explore other opportunities.
Are You Looking to Buy a Franchise Business?
Whether you plan to start a new franchise location or buy a pre-existing business, both require extensive research. Getting started on the right foot is key to running a successful business, and FranNet can help! Our expert franchise consultants are prepared to help you find the right franchise opportunity and provide you with the resources you need to get started. We will guide you every step of the way. Schedule your free consultation today!