Read on to know how a systematic approach can help you get the most out of your decision to buy a franchise resale!
Franchising, in recent years, has opened a plethora of opportunities for individuals in the UK to not just enter the traditionally closed-door world of business but also achieve great success. From common retail franchises to new-age home-based franchises, there exists an ever-growing variety of niches in this sector. As we have already discussed in our How to Choose a Franchise guide, this abundance of choices can often lead to confusion.
In addition, making your first franchise operation work is not as easy as it may seem. Site selection, finance, staff recruitment, accounting, taxation, insurance and quite a few other fronts need to be manned successfully before you can turn your franchise into a well-oiled profit-making machine.
If all this sounds too overwhelming for you, franchise resale can very well be an option worth exploring.
What is a Franchise Resale?
Typically, when you buy a new franchise, you deal directly with the franchisor. Drawing up the Franchise Agreement is the most important step in this process. The terms of agreement and further negotiations take place between you – the franchisee – and the franchisor, without any intervention from a third party.
A franchise resale, however, is an opportunity to buy a franchise from another franchisee, and not the franchisor. For various reasons, franchisees may want to put their franchise up for a sale, rather than merely terminating the Franchise Agreement, liquidating the assets and walking away. In fact, a significant percentage of franchise operators use franchise resale as their prime exit strategy.
So, in essence, a franchise resale opportunity lets you buy a ready-to-run franchise unit from another franchisee.
Dealing with the Scepticism
It’s very natural for you to look at a franchise resale opportunity with scepticism. The most common response in such situations is to think that there’s no way the franchise unit will be up for a sale unless there was something wrong with the business.
While true in some instances, this is never the case for a majority of franchise resales. There are numerous reasons why franchisees would want to sell their franchise units. Some of these include:
As noted earlier, the sole aim for some franchisees is to add enough value to their franchise unit so that they can sell it off at a profit. As a potential buyer, you should place such franchise resale opportunities at the very top of your shortlist.
In some cases, the franchisee is forced to exit the business for personal and/or professional reasons. From retirement to relocation and medical problems to tax issues, these reasons can greatly vary in size, scope and nature.
In some cases, the business grows much larger than anticipated by the franchisee, forcing them to sell it off in order to avoid stagnation.
As a buyer, you will always need to know the precise and true reasons why a particular franchise unit is being sold on.
When Should You Buy a Franchise Resale?
There’s no algorithm that’s set in stone and can tell you with certainty if a franchise resale is the best way for you to enter the world of franchising. There are, however, some broad criteria that can help you come closer to making an informed decision.
The first and the foremost among these is what you – as an entrepreneur – bring to the table. Take, for example, some questions you can ask of yourself before you buy a franchise resale:
- Have you run a business of your own before?
- Are you familiar with how to set up a business from the scratch?
- Are you willing to put in excess resources – time, energy and money – to build a customer base in a new territory?
- Are you more comfortable with running a proven business model rather than building one of your own?
Answers to these questions can give you an indication of the way forward you should be taking.
Advantages of Buying a Franchise Resale
The advantages of buying a franchise resale run wide and deep. Let’s discuss the most important of these.
No ‘Cold’ Period
The ‘incubation’ period of a new business can stretch from months to years, depending upon its nature and size. If you buy a new franchise unit that comes with a brand new, untested territory, you will need to be prepared to withstand the initial ‘cold’ period during which sales will be minimal. Much of this period will need to be spent building the market presence, perfecting the business operations and acquiring customers. This will, quite obviously, lead to you making insignificant profits, if not none at all.
A franchise resale doesn’t usually have this problem. If you buy a profitable franchise that can boast of a steady customer base, your business can start making money right from the word go.
Not a Lot of ‘Fine-Tuning’ is Required
This point really comes to the fore if you don’t possess the hands-on experience of running a business. Franchise resale opportunities let you simply take over from the previous owner and continue the profitable ways of operations. You can, of course, fine-tune the business to suit your style, but these changes, in all likelihood, will be peripheral, not critical.
No ‘Staffing Blues’
Recruiting reliable, efficient and experienced personnel is much more difficult than many imagine. It can be all the more tiring – frustrating, even – if you don’t know how to go about it.
With a franchise resale, you can bypass these headaches by simply choosing to retain experienced and trained employees who are familiar with the business. This can not only save you a good deal of money, but also give your business a remarkable head-start.
Minimising the Risks
Buying an up-and-running business poses lesser risks to the investment of capital, provided that you have done your ‘homework’. This, like all other businesses, applies to franchise resales, too.
If you spend enough time researching a franchise resale opportunity, you can get an invaluable insight into the cashflow dynamics, profit margins, market presence and customer analytics of the business. This lets you decide how much money you should invest upfront to buy the said franchise without assuming undue risks. Brand new franchises, on the other hand, have no such track record that you can base your decisions upon.
Ready-to-Use Trading History
This is perhaps the most underrated advantage that comes with buying a franchise resale. As you may well know, the trading history of any business is the first marker of its performance. Whether you want to lease assets to drive growth or you want to take out emergency cash credits, the trading history will always be looked at by prospective lenders and banks.
When you buy a franchise resale, you ‘inherit’ the trading accounts, trading history, assets and credit score from the previous franchisee. If all of these are in excellent health, your franchise business will be off to a great start.
Does It Always Make Sense to Buy a Franchise Resale?
While buying a franchise resale comes with a host of advantages, it wouldn’t be too prudent to say that doing so makes sense in each and every case.
If you have adequate experience of running a business, handling administrative tasks, manning multiple fronts successfully, managing employees, leading a team and staying on top of numbers, you may very well be the right person to buy a new franchise. What’s most important to know here is that franchise resales, thanks to all these advantages, carry a steep mark-up.
From a routine 5 to 10%, this mark-up can go as high as 30 to 50% if the resale opportunity is immensely attractive. So, it only makes sense to buy a franchise resale if you are absolutely sure that the added upfront costs are more than satisfactorily compensated for by the benefits of convenience.
Things You Should Know Before Buying a Franchise Resale
Choosing the best franchise for you is rarely a straightforward decision. Quite a few factors need to be considered and many possibilities weighed before you zero in on a particular franchise, as we have discussed at length in our How to Choose a Franchise guide. Most, if not all, of these things must be taken into consideration while buying a franchise resale.
Furthermore, you should strive to extract as much information as you can about the franchise resale that you want to buy. This includes taking stock of points below:
Why Is the Franchise Being Resold?
Right at the top of this page, we have discussed some of the most common reasons for franchisees to put their franchise units up for a sale. Before you buy such a franchise, however, you must always know fully well why the franchise is being sold on. Having a candid discussion with the seller can give you answers to this question.
What is the Franchise Agreement Going to Be Like?
It’s very important for you to know and understand the terms of the existing Franchise Agreement. Even though you will eventually end up drawing a new Franchise Agreement with the franchisor, studying the existing agreement will give you an insight into the way the franchisor conducts their business.
Is the Mark-up Justified?
Successful franchises will never be resold at a loss. The mark-up on the price will depend upon the sales volume, market share, location, brand recognition and many other factors. However, you should always make sure that the price you’re willing to buy the franchise at is justified.
Do the Accounts Look Good?
This is where you will probably need some help from a professional accountant. Studying the books of the franchise is a great way of assessing the health of the business. It should, however, be noted here that this is possible only after you have indicated your intent to buy the franchise.
Are You Going to Have to Make Too Many Changes?
Does the franchise conform to your idea of doing business?
Are the employees experienced and content?
Is the customer base steady as well as loyal?
Is the market saturated already?
Many more questions like these will crop up during the course of your investigation. If you think that you are going to have to make numerous changes in the way the franchise operates, it might be a better idea to buy a brand-new franchise at a lower price.
Have You Talked to the Franchisor?
Many Franchise Agreements have resale clauses that clearly state that each franchise resale will need to be approved by the franchisor. Thus, you will need to get in touch with the franchisor to know what their expectations from you are. This discussion will also help you lay down the informal framework for the new Franchise Agreement, if the deal comes to fruition.
How Buying a Franchise Resale Works
Buying a franchise resale is a tad more complicated than buying a new franchise as you will be required to negotiate with two parties – the franchise seller and the franchisor.
Here’s a schematic of steps involved in the process of buying a franchise resale:
1. Studying the Prospectus of Sale
The prospectus of sale is a document prepared by the franchise seller. It typically contains all the critical information concerning the business to help potential buyers assess the case. As one of such potential buyers, you will need to carefully study this prospectus to understand the merits of the opportunity better.
2. Arriving at a Number
The prospectus of sale will tell you what the franchise seller thinks their business is worth. As a buyer, however, you will need to arrive at a number that makes more sense to you. Business valuation, especially in regard with businesses that haven’t been trading for long, represents tricky waters. As you will be investing a significant amount of money in this venture, it’s best to hire experienced business accountants to help you appraise the franchise.
3. Negotiating with the Seller
Once you have the valuation ready, you can negotiate the numbers, terms and other matters with the franchise seller to draw up the sales document. Most franchise resales are subject to other parties – the franchisor, the bank/other lenders and investors – okaying the terms.
4. Negotiating with the Franchisor
After the initial agreement is in place with the franchise seller, you can finalise the terms of the Franchise Agreement with the franchisor. While many franchisors may agree to use the existing terms for the franchise unit in question, minor tweaks are often required to safeguard the interests of all parties involved.
5. Completing the Process
The last step involves completing all the necessary legal, administrative and financial processes to finalise the deal.
An Informed Decision, As Ever, Is the Key!
Throughout our series of free franchise resources, we have maintained that making an informed decision can save you time and money. This applies just as positively to franchise resales, too. An in-depth analysis of shortlisted franchise resale opportunities will certainly help you minimise the odds against you and put your business on the right track.