The pathways of life, business, and entrepreneurship may feel complicated, but franchising doesn’t have to be. You can become involved in operating a franchised business in two ways.
The first is to enter into an agreement with a franchisor to take a territory where no other franchisee currently operates. The second is to acquire an existing franchise business from a franchisee who wants to leave the network. This second approach is known as a franchise resale.
What’s a Franchise Resale?
A franchise resale is when you buy an existing franchise business; one that’s already been established and operating. Franchise resales could be the sale of the franchisee’s business or its assets.
It is usual for a franchisee to be given the right to sell its business. Franchisors should set this right out in the franchise agreement. While every franchise agreement is different, in theory, a franchisee can sell its business at any time.
How Do Franchise Resales Work?
When you purchase an established franchise business from a franchisee, you will be dealing with two parties: the franchisee you are purchasing the business from and the franchisee’s franchisor.
You will negotiate the acquisition price and terms of the transaction with the franchisee to purchase the business, but you will still need the franchisor’s approval.
Most franchises need the franchisee to be trained, and some even demand that the franchisee be knowledgeable in a specific field. The new franchisee will be required to complete the required training and deliver the same level of service as if the franchisee had not changed.
The new franchisee’s bar is set high; they must meet the franchisor’s requirements as if they were applying to join the network directly. A resale purchaser is usually required to meet the same requirements and criteria as a typical franchisee.
If a franchisee seeks to sell their business near the end of the franchise agreement’s term, the value of the business may decline, especially if the agreement has a year or two left to run.
Any agreement should include a clause about the selling of the business. In this part, you’ll learn whether the franchise agreement provides a whole new term to be awarded to a resell buyer of the franchise.
Some sale of business clauses simply allow a buyer to take over the remaining term of an existing contract. Suppose the sale of business clause stipulates that the purchaser enters into the franchisor’s current model of the franchise agreement, which includes a right of renewal. In that case, the purchaser will receive the remaining term plus the right to renew.
Suppose the balance and renewal term aren’t long enough to satisfy the buyer. In that case, the buyer must negotiate to see if the franchisor will give a new agreement with a longer duration.
The resale of a franchise can begin if a franchisee, a franchise purchaser, and a franchisor have reached an agreement on their respective terms.
Pros and Cons of Purchasing Franchises for Resale
When you buy an existing franchise from a franchisee, you inherit all of the franchisee’s assets and personnel, but you’ll have a running business right from the start.
Purchasing a resale franchise can often be a wise decision, as the franchise already has a customer base and will (hopefully) be well-known in its location. The appeal of this strategy is that the cost of obtaining a franchise in this situation is likely to be less than the cost of acquiring an existing lucrative franchise.
However, regardless of how you go about buying a franchise, you will require working capital. You’ll probably have few customers initially; therefore, your turnover will be lower than your outgoings.
The cost of purchasing a franchise through a resale is determined by the profitability of the business you acquire.
If the franchise for sale is prosperous, you should expect to pay twice its annual profits before taxes and before deducting any payments (such as dividends or salary) to the franchise owner. If the business is not profitable, on the other hand, you would usually only pay a minimal amount or a payment that reflects the worth of the assets being transferred.
The glaring con of purchasing a franchise offered through resale is that the seller is seeking a chance to leave the franchise’s network. The current owner’s desire to sell could stem from several reasons that might not be made evident to you at first glance. To learn more about what you’re getting into, you must approach a franchise resale delicately.
How to Approach a Franchise Resale
You should conduct the same due diligence on an existing franchise as on a new one. You should look into the seller’s trading history and motives for selling the company.
If the franchise requires a physical location, you may be required to take over the lease of an existing franchisee. You should also determine whether you will be required to pay any costs to the franchisor when joining the franchise, such as for training. You should seek counsel from an accountant and a British Franchise Association affiliate lawyer on all of these matters.
People sell their franchises for many reasons, so you must get the business valued, whether buying or selling yourself. Be sure to consult others on how to value a franchise resale.
Through evaluations, offers, and a bit of advice from Franchise Local, you’ll be able to learn what franchise shows you the best resale franchise opportunities.
