Buying a franchise resale

By Derrick Simpson, Franchise Resales

So you’ve decided that you are going to buy an established business rather than setting up a business from scratch. You are not alone in having this particular thought because more and more enlightened people are recognising that to take over an existing business then develop and build it makes a lot of sense when compared to the risk involved in starting with a new concept or idea. An existing business has cashflow already, customers in place, staff (if appropriate to the business) and a brand presence.

Extending that thought process it is only natural therefore that people seeking to acquire an existing business should consider an existing franchised business because doing so gives you the best of both worlds; an established business with a current cashflow etc to build upon and the security of operating a business where the success rates of franchising are well known to be higher than independent operations.

Most franchisors will have franchisees within their network who have decided they want to put their business on the market and sell. Franchisors won’t openly advertise the locations that are for sale because most of their franchisees wouldn’t like it to be general knowledge they are thinking of moving on. They will however discuss them with you, confidentially, once you have passed the franchisors initial approval stage. You can then decide whether to opt for a new location or to take over one of their existing franchises.

Within the franchise industry business sales or transfers are known as “Resales”. This is because a franchisor has sold the location/territory initially and now the licence to operate in that location/territory is being sold-on to a new franchisee, hence the term “franchise resale”. In some more mature networks a specific location may be re-sold several times over as the various owners of that business have decided to capitalise on their investment and hard work selling the business on to new owners.

So what do you have to look for when taking over a franchise resale? How can you be sure the business is sound? Surely it is more expensive to buy an existing business than starting up from scratch and why is it being sold – what’s wrong with it?

All of these questions you would be totally right to ask and equally right to expect clear concise answers from both the franchisor and the selling franchisee. These however would also be the questions you would ask the seller of a non-franchised business, they are the logical questions to ask. It is not that you need to be more or less diligent with your questioning about a franchise; you should in-fact be able to receive more comfort about a franchise resale than an independent business transfer or sale because with a franchise resale you have the franchisor to corroborate the information about the business involved. They will not be able to guarantee the information but they will know a lot about the particular business and will certainly have a view on its performance and potential.

These therefore are the key elements of successfully buying a franchise resale:

Information

The selling franchisee should produce a detailed Prospectus of Sale that provides you with all the necessary information about their particular business to enable you to decide if you are interested or not in acquiring it.

This Prospectus is not about the whole franchise opportunity, you will gain that information from the franchisor whilst going through your interview/fact finding process about which franchise business to join. This is about the specific business opportunity you are considering buying.

Other than the sales turnover levels and profit figures shown within the trading accounts, which should of course be up to date, the amount and type of information contained in a prospectus will vary according to business type. For example premises based businesses such as a Snappy Snaps Photo/Digital retail business will have a Prospectus which contains details of the staff, the equipment both owned and leased, the premises etc, whilst a Myhome cleaning franchise will have simply details of staff and equipment and a single person consultancy business will be simpler still.

The Prospectus should also contain a description of the location/territory and the marketplace within which the business operates. It should also have the reason that the business is being made available for sale.

Most franchisors will assist their franchisees to write such a document or outsourcing that advice to third party advisors such as Franchise Resales Ltd.

Valuation

The business will naturally have an asking price attached to it and this should, in most cases, have a close relationship to the levels of pre tax profit the particular business generates. An enlightened franchisor will have assisted the franchisee in arriving at the decision about asking price and the very best advice is for the franchisee to obtain a franchise specialists totally independent view as opposed to asking either the franchisor or their own accountant to value the business. The logic behind this is that you as the prospective purchaser will use an accountant who will arrive at a comparative value and if the seller has also taken independent advice the chances are both valuations will be fairly close and so the gap to be bridged through negotiations will be smaller that it otherwise might have been.

There are various ways to arrive at the ball-park valuation for a business but the majority of accountants will apply a multiple of pre-tax, pre-drawings to do this. That said, business valuation is not an exact science. Its purpose is to give a reasonably close idea about where negotiations on the final price should start from and there will be more than simply a profit multiple that decides what is eventually paid.

Negotiation

Negotiation is a delicate and often frustrating part of any sale/purchase because the buyer and seller have conflicting goals as each participant wants to get the most for what they have to offer.

As the purchaser you will need to believe you can better the sellers performance and make enough money to cover the asking price; any finance costs and of course make a profit. The seller must be clearly demonstrating what the business can deliver and the capacity of the marketplace/opportunity that is there to be developed. The seller should also take into consideration that the buyer may be considering more than one opportunity so should not “push it too far”

Negotiation is about compromise, about give and take and seeing the position from the others perspective. “Hard ball” play from either party negotiating simply ends in frustration and failure. That said, negotiations are mostly very friendly affairs with both parties knowing there is a mutually beneficial goal in sight, agreement.

If one side thinks they could have got a little bit more and the other side thinks they paid a touch too much the deal is probably at just about the right level.

Completion

Any business sale requires a legal completions process and franchise resale transactions are no different. With a franchise resale however there are three parties involved; the seller, the purchaser and the franchisor. Yes the franchisor has an interest in the transaction and should be a party to the final Sale and Purchase Agreement. This is because in a franchise resale the rights to use the business name, the logo and the knowhow remain with the franchisor so they must approve the terms of the sale of one of their businesses.

To contact Derrick please email derricks@franchiseresales.co.uk or telephone +44 (0)7802 567597.