Past questions for buying a franchise resale

Qu: My husband and I are thinking of purchase of a resale of care franchise. They would like us to buy as share sale although they have always said it would be an asset and goodwill sale. What shall we do and what are the risks for share purchase?

Answer: You asked about share sales and whether there are risks attached. As is often the case there is no simple answer to this. A seller will be usually far better off financially (post sale taxation) if they sell the shares in a business rather that the assets/goodwill. A purchaser will have a smoother entry into the business because all the staff, assets, property, leases and contracts all transfer to the new owners as part of the share sale process. There is, for example, no TUPE transfers for the staff to go through. This is especially helpful where, for example, CQC accreditation is required. In some care franchises the franchisor stipulates the sale must be a share transfer process.

Qu: I am considering buying a franchise. I have been offered the opportunity to buy the existing business that has been trading for 14 months as the owner wants to continue growing the company.

They have asked for that I sign a confidentiality agreement and give a £2000 deposit to look at the financial information such as turnover and profit etc (although they have already given me a rough indication of turnover).

Could you advise whether this is normal practise for selling a business as a franchise? It seems strange to me that they are asking for £30,000 to invest in a business that I haven't seen the figures of. If the figures don't add up and I choose not to invest, or I cannot get financial backing etc, then I lose £2,000.

Also, I would surely perhaps struggle with getting the financial backing if I do not have that information. The signing of the agreement I have no problem with but I am very unsure about the money. What is your advice?

Answer: I think you are wise to be cautious. Signing a non-disclosure agreement is one thing (and must be insisted upon by the selling franchisor) but no one should be asked to pay a deposit, especially a non-refundable one, just to see the figures of a franchise business for sale.

Qu: I would really appreciate your help and advice on the following two questions. I am considering buying an existing franchise which is 3 years into its 5 year lease agreement. If I were to buy it and in 3 years time wish to resell the business, I guess as it would then be on a rolling contract and therefore its value would then be significantly less? Or if I was to walk away from the franchise, could I continue the business under a private name within the same area?

Answer: The usual process when purchasing a franchise resale is for the selling franchisee’s franchise agreement (FA) to be terminated at the point of completion of the sale and a new FA issued to the purchaser by the franchisor. This is done for the benefit of both parties.

Qu: I am interested in acquiring an existing franchise. I would like to understand the risks associated with this transfer especially to someone who is new to this industry and most likely to the area of the franchise.

Answer: Purchasing an existing business has many benefits as I am sure you realise. Cashflow from day one, an existing brand presence in the local marketplace, a client base etc etc. Clearly there must be downsides also but mostly these can be minimised with careful screening of opportunity.

Qu: I am looking at buying a well-known children's franchise which I have known for many years as a customer. The current owner bought it 2 years ago and it is now loss- making, having been very healthy 2 years ago. I am most interested in the legal requirements here and have been told we will each need to retain our own solicitor to transfer the business at a rate £2000 for a business sale agreement and further £1000 for the franchise purchase. Does this sound reasonable and necessary?

Answer: The best advice is always to transfer the ownership of a business through a legal agreement and that of course means engaging solicitors which do, as you state, cost money. That said most people would not consider a house sale or purchase without a lawyer involved to protect their interest and the same applies with a business sale.

The level of detail that is required will vary depending of the scale of the business involved and its complexity and as you have only stated it is a well know children's business I would guess it is smaller rather than a larger operation. You also state it is loss making so the selling price is low.
I would always take legal advice and always use a solicitor that is affiliated and accredited by the bfa.

If the sale is being done through the franchisor, rather than from the selling franchisee that may give you the confidence to waive a solicitors input. That said the fees you quote are quite reasonable for legal advice.

Qu: I am looking at a franchise resale. The asking price is about £10,000 more than the launch price. This is to purchase the goodwill of the ongoing customer base. What criteria should l use to value this?

Answer: When a business is sold by an existing franchisee the value of the Goodwill business is usually calculated as a multiple of the transferable profit that business generates. Transferable profit is that which the buyer can reasonably expect to continue to make and so excludes items such as tax, interest and any money taken out by the owner. That multiple can be anything from 1.00 times to 4.00 times depending on the business and the sector in which it operates.

The original franchise set up price is not usually considered when reaching a valuation because this is charged by the franchisor to cover the initial franchise fee, their costs in establishing a new franchisee and pay for their training.

You do not say if the business is being sold directly by the existing franchisee or by the franchisor on their behalf. However, the value of any business, at whatever level of investment, is that which a purchaser is willing to pay and valuation calculations can only ever be a guide to indicate the right 'ball park' for the offer.

Qu: Can l ask why there are so many greeting card franchises for resale; are they not good franchises to invest in?

Answer: There are a number of greetings card franchises being offered as resales but given the size of the market and the number of franchisees involved in the various greetings cards companies, it really isn’t that high a number.

Most mature franchise organizations will expect to have a turnover of franchises each year with many reaching around 10% of the network strength. So if a franchisor has 60 franchisees they could expect to have around 6 or so for sale at any one time. With six or seven franchisor networks within the UK it is easy to reach quite high numbers of potential resales in a single sector each year.

Certainly it doesn’t mean there is a flaw in the business model or concept.

Some franchisors do not publicly advertise their resales and only introduce prospective franchisees to a resale once they have applied to join a network and been approved. They may also use an external agency such as my company Franchise Resales to facilitate the resale process for them. It is a healthy process for franchise networks to have many resales as this demonstrates the lifecycle of being a franchisee, provides an eventual exit route by being able to capitalise on your investment and hard work. It also brings new franchisees into a franchisors network to grow the individual businesses further. It additionally provides the opportunity for new franchisees to buy into an existing business with all the benefits that brings, rather than having to start up from scratch with a new operation.