In this section, you will find comprehensive advice from a range of experts on buying a franchise resale. This includes the benefits of buying a resale versus buying a â€œnewâ€� franchise, how to identify if it is worth the asking price, researching a resale to find the one thatâ€™s right for you, business planning, how to obtain funding and what legal advice do you need to take.
Why existing franchises are for sale
As the franchise market in the UK matures, the resale of franchise businesses is becoming extremely common.
There are many reasons why there are franchises for resale in the UK, including:
- The franchisee is retiring
- The franchisee is looking to relocating
- The franchisee has other business interests that they need to concentrate on
- The franchisee, or a loved one, are ill and so they are unable to give a 100% commitment to their business
- Their exist strategy has always been to sell the business after a certain amount of years and to make a profit
- They have realised it is not the right business for them
What sets a resale apart from a new territory?
You may pay a premium for buying a UK franchise for resale, perhaps as much as 30% if the business has a good track record, but if a greenfield site that needs building from scratch is a daunting thought, a franchise resale may be right for you and worth the extra money.
As well as the traditional benefits of franchising, including the training, support and use of a proven business format, when purchasing a franchise for resale you are able to take advantage of actual trading accounts and of course an existing client base, making your future a little easier to predict.
What you should look for
An existing business should be able to show you some actual performance figures, together with any management figures produced. You should also be able to obtain from the franchisor the figures provided to them by the franchisee for verification.
Also seek the advice of an accountant as to whether the sale price represents value for money. If the franchisee has any staff it may be useful to ask them what they think of the business.
Why not also conduct some of your research through the existing client base – after all it is they who will keep you going in the future. Are the customers happy, can you retain them once you have taken over, how can you enhance the customer experience in the future and are there more customers out there?
Pay some attention to the existing franchisee’s relationship with their customers and if there appears to be little loyalty be aware that you may have to rebuild confidence and equate this to the premium that you may be being asked to pay. Conversely, if you find that the franchisee has an excellent relationship with clients, consider a hand over period to allow a smoother and more effective transfer of ownership and of course ultimately success for you!
Why buy a franchise resale
Franchise resales are big business in 21st century and investing in such an opportunity presents certain advantages over a new franchise location or independent business. Nationally renowned Franchise Resales Consultant for Franchise Sales & Resales, Jess Bains, elaborates.
As with any business transaction, when investing in a franchise resales opportunity, it is imperative that you recognise what you are receiving in return for the money paid to the franchisor. While the franchisor does provide assistance in exchange for the fees they receive; not all of them are identical.
Franchisors provide value in different areas depending on the strengths and strategy of their business model. You should identify why you are buying one franchise over others and set appropriate expectations before making your decision.
A franchise Resale provides advantages in the categories listed below:
Established Track Record
When you buy a franchise resale, you are usually investing in a franchise concept, which has products and services that have sold successfully.
You will have trading history to learn from and to support your forecast for the future. Investing in a franchise resale is based on an already existing business model that, in most cases, has worked successfully for the franchise owner.
A franchise owner can profit from the brand recognition that a franchise resale provides. If you start your own business it can take many years to build a brand in a competitive market.
There are no guarantees that the consumers will identify the brand as a product leader. A franchise resale can provide owners with immediate brand recognition.
Instant Cash Flow
An established franchise for resale will offer instant cash flow. If you start a new business it may take anything from 12 to 18 months before your business starts to make a profit. With a franchise resale you have an existing customer base of clients using your services and products.
Most franchises for resale will have experienced team of staff, who will have been trained and experienced in the day to day running of the business.
The existing franchise owner may also stay on for a period of time, enabling a smooth takeover period and to ensure you fully understand the systems and working methods of the franchise resale. The franchisor will provide training where appropriate; a five to 10 day induction course is typical.
It can be extremely costly for an independent business owner to market their business, whereas a franchise resale has the advantage of already having an existing marketing strategy in place.
Also, the franchisor will have a franchise agreement that normally works to supply franchisees with marketing campaigns to ensure customers identify with and remember the brand. Belonging to a franchise reduces marketing costs, which are shared equally with other franchise owners.
Investing in a franchise resale limits the risks that are involved in business, most banks will look favourably upon lending to a franchise resale as opposed to a new business start-up.
Advantages of buying a franchise resale
by Derrick Simpson, franchise resale expert
The statistics relating to the success of franchises bought as sales of existing businesses are becoming well known and are being taken into account by prospective purchasers.
Results of the NatWest/bfa Survey of UK Franchising show that 7 out of 10 franchises acquired over the last two years had been previously operating before they were bought. A clear indication the message about the strength of a resales acquisition over a new “greenfield” location is being recognised as the logical way to buy into franchising.
The stability obtained through taking on a trading business is clear to see:
- Cash flowing through the business from day 1
- Brand presence in the local market place
- Clients and customers from the start
- Stock, staff and property (if appropriate) all in place
- Business to planning is easier to develop from known data
- Smoother funding process due to the proven business history
- The purchaser’s task is to grow what is already there
Developing a business presence in a new territory can be time consuming and costly so the advantage of taking on an existing franchise, that is already known in the area and which has current customers and clients, is clear.
That is not to say growing any business is easy - far from it – but it is easier to move on and drive a process that is already underway. To speed up a rolling ball as opposed to pushing it to start from a standstill position is always the energy efficient option.
The above positive elements which demonstrate why buying a franchise for resale would be a strong option to consider also make the opportunity attractive to secure banking facilities for your new business.
All businesses will usually require some form of banking facility and many will require additional funding most often in the form of a loan. If not a loan then, at the very least, an overdraft facility is usually required to support a level of working capital.
When presenting a structured business plan to the franchise units of a bank to secure these facilities, the strength of the proposal and therefore the likelihood of its being approved will, in part, depend on your business projections.
With an existing business there is clear evidence of what has been achieved by the current owner so projections can be based on fact and this will give considerable weight to the proposal. This in turn will make it more likely to be accepted because the previous trading history and brand presence plus your drive and background all combine with a franchise resale to make this option the logical route into franchising.
How to select the best franchise resale for you
Purchasing a resale franchise can have some great advantages over starting a new business from scratch, but there are also some pitfalls to avoid. Resale franchise units may consist of successful operations that are making money as well as units that are either losing money or barely making ends meet. Whether the existing business is successful or not it can potentially represent a rewarding opportunity for you, but the risk associated with an under-performing unit is substantially greater. Before looking at the various resale opportunities out there, you should consider your own strengths and weaknesses as the potential new owner.
One of the first tasks is to establish the true reason the business is being sold which may not necessarily be what you are initially told. Are the outgoing franchisees ready to retire, just want a change of lifestyle or are they trying to escape an unbearable grind of long hours for little reward. Sellers will be canny enough not to tell you the business is awful, so you're not going to want to buy it from them. They will dress up the business as best they can to achieve a sale at the best possible price. You’ll need to speak with the outgoing franchisee but also to look at other sources of information. Resources available should include the franchisor as well as other franchisees in the network or other industry sources.
Once you’ve established their motivation for selling look at the financial performance over the last few years and the trends. Are the sales growing, stable or in decline? Mature businesses with track records of success that can give you cash flow from day one. The business is already trading so will have customers, enquiries, sales and service delivery from day one, however struggling businesses may have poor relationships with their staff, suppliers and customers which may impact your ability to turn them around. You should ask the franchisor to confirm the information you're receiving from the seller. If the seller is not being honest with you, you'll often pick up clues from comments made by the franchisor. Prospective buyers are advised to fully investigate the business and seek professional advice.
A resale opportunity will suit investors who can multi-task and want to hit the ground running. If you prefer to start from scratch there will be different challenges to face in building a customer base, sales and a local market presence. You should select the choice which you are most comfortable with. A buyer needs to adopt a structured approach to ensure that they truly understand the potential of the business opportunity. The best franchise therefore is the one that most fits a prospective purchasers skills and aspirations. Each person will have a view of what opportunity suits them best. A prospective purchaser needs to see beyond the recruitment hype and drill down to the heart of the business opportunity.
Purchasing a resale will usually be more expensive than a buying new franchise territory. This is because the target business is probably generating an existing profit and the selling owner will be paid a premium for their business. If you haven’t got the required capital from savings then financial assistance is at hand from banks, such as Lloyds, that specialise in the franchise market. This may require you to take out a business loan and usually inject at least 30 per cent of the capital required from your savings.
With a new franchise territory you pay the franchisor an initial franchise fee plus, usually, some training and set-up costs. A new business has to grow from scratch so will not generate profit for a while and will require a high level of working capital to meet the operating expenses as it grows. A resale generates cash flow from day one and, hopefully, generates immediate income for you.
Franchise resale considerations
If you are looking at a buying a franchise in an established and mature network, you should consider buying an existing business from an outgoing franchisee.
Here are some of the key areas you need to think about:
- Why is it selling? - As well as your research into the franchise itself, you will also want to find out about the reasons for the sale – is the franchisee retiring or have they found that the business is not right for them?
- Business performance - Get advice from your accountant. How has the business performed, what do the audited accounts show, is the business profitable? It may not be, if the previous franchisee has underperformed. You need to check if this is just a one-off, or if a large number of the network is having problems?
- Research local market - Assess the market in that area, what is the competition, has something changed which will affect the business (high street pedestrianisation for instance).
- Resale costings - Is the asking price reasonable, look at other businesses for sale in your region and again, speak to your accountant. How long will it take you to repay any borrowing to buy the business? Is that a reasonable payback period? Can the price be negotiated; are all the fixtures and fittings, equipment, stock, etc included?
- Sale considerations - How is the sale being structured? There are two types of sale that the franchisee can employ; share sale or asset sale. These are both very different and it is important that you understand the implications of each. Ensure you seek legal and accountancy advice before committing.
- Personal savings - Do you have enough capital and security to buy into an established business? The costs will be higher than buying a brand new franchise where the concept has not been established. However an advantage of purchasing an existing business is that if finance is required you will have existing accounts to demonstrate to the bank how the business has been performing.
There is a lot to consider, but taking over an existing established business could provide a quicker route to a higher return, and should be generating income from day one.
Investigating a franchise resale
Manzoor K Ishani, Legal Franchise Expert
When considering buying a franchised business as a going concern the purchaser should not drop his or her guard. All the rules which normally apply with the purchase of a franchise apply equally to the purchase of a franchised business as a going concern.
To the extent that it is possible, a purchaser should try to find out the true reason why the outgoing franchisee is selling. It may not be a simple matter of the outgoing franchisee wishing to retire or to do something else. Searches may reveal that there is a development locally (road widening scheme, competitor moving into the market etc.) which may have a serious impact upon the profits of that business.
The purchaser should take the trouble to investigate both the franchise and the franchisor thoroughly.
Apart from the usual queries, the purchaser should try and speak to as many franchisees as possible to get their view as to the profitability and potential success of the franchise and of the support given by the franchisor.Apart from the usual provisions which apply to the purchase of a franchise , there is an additional dimension to buying a franchise business as a going concern.
The purchaser should be aware of the fact that he or she is not only buying a franchise but the business itself and therefore needs to make sure that upon taking over the business he or she will not be liable for the liabilities of the outgoing franchisee, that the outgoing franchisee warrants the past performance of the business etc, and finally, the purchaser needs to be aware that he or she will become responsible for all the employees of the outgoing franchisee and should therefore take steps to protect him or herself against any potential liability from those employees.
Business planning for buying a resale
Researching at the UK franchise industry you may already have picked up that a franchise business is more likely to grow quicker and survive longer than an independent start up, so naturally banks involved in providing funds for franchisees offer more favourable terms to purchasers of franchised businesses than they would to an independent new start up. If you require financial assistance to purchase your chosen franchise you will need to prepare a structured business proposal for whichever bank you approach for funding.
Developing a business presence in a new territory can be time-consuming and costly. All businesses will usually require some form of banking facilities and many will require additional funding. With an existing business there is clear evidence of what has been achieved by the outgoing owner so projections can be based on fact and this will give considerable weight to the proposal. There are clear advantages of taking on an existing franchise that is already established. These advantages also make a franchise resale attractive to secure banking facilities for your new business.
One way to guarantee that you receive relevant, sector-specific support and funding is to approach a lender that has a dedicated franchise team, such as Lloyds Bank. In doing so, your bank manager will have a solid understanding of the challenges that franchise owners are likely will face, and can tailor the most appropriate funding to fit your requirements.
Before your first meeting with the bank manager it is important that an extensive business plan is produced. If you’ve never written a business plan before it is advisable to undertake the Business Planning section of the Prospect Franchisee Certificate which has been jointly developed by Lloyds Bank and the British Franchise Association. This modular training program of informative videos is completely free and can be accessed via the http://bfa.trainme.tv/ site. In addition to covering the financial aspects of franchising the program also provides essential insight into what it takes to be a successful franchisee.
A significant amount of time and effort should be put into your proposal as it is the first introduction the lender will have to your business. The plan should provide a detailed description of the service and products you provide, whilst outlining your objectives and strategy to build a profitable franchise. The business plan should be punchy and a common mistake is to make it too detailed with information that isn’t relevant.
Ensure that it grabs the bank manager’s interest. The bank isn’t looking for a two hundred page document going into microscopic detail however it will expect you to provide commentary on your skills and experience, business objectives, the franchise brand, local market, competitors, potential clients, suppliers, premises, staff, marketing strategy, financial requirements, available security and any contingency plans you may have considered.
The initial objective of the business plan is to help you raise finance. It is also a working document and it’s essential to review your performance against your original projections, alerting you to anything that is not going according to plan as well as identifying potential opportunities for the business.
The plan should demonstrate that you understand the business opportunity and the local market for your product or service. Most banks can provide a business planning template for you. Accountants can also provide advice in producing the plan, but remember it is your document and is too important to leave to someone else to write.
Financial projections for a franchise resale will be based upon the existing trading performance however if you are proposing to increase sales or reduce costs then clearly identify how you are going to achieve this in your plan. Forecasts for a new territory franchise are an even more vital assessment tool. Most franchisors will provide you with illustrations of possible trading performance, but it is up to you to dig deeper. Find out what the financial projections are based upon and the assumptions that have been used.
A business plan is a useful tool to help gather thoughts and set objectives for the business. It should demonstrate that there is sufficient demand for the product or service and that you have a good understanding of the market. It should also set out the competitive advantage or unique selling point your business may have.
Financing a franchise resale
It is good practice to send a copy of your business plan to the bank manager a few days ahead of your appointment to allow them to become familiar with the content. The document should achieve a comfortable balance between being professional yet interesting to the lender.
As your meeting approaches you should have an excellent understanding of your strategy, and it is advisable to prepare and practice a script that briefly introduces your business proposal. This projects a professional image and offers credibility to your proposition, and the depth of your research will allow you to comfortably answer any questions posed. The bank manager will naturally be interested in the operational and financial aspects of your business, and will expect you to be able to respond confidently and accurately.
Think of those entrepreneurs on BBC's Dragons Den programme. From the outset, many don't stand a chance of securing the investment they are seeking because their presentation is poorly conceived, or they don't have a good understanding of the key financial information. Consequently, they are unable to establish their own creditability and project confidence in their business.
Whilst it may seem obvious, it is essential that you are dressed appropriately for the meeting and arrive on time – first impressions count. The combination of a professional approach and a workable strategy delivered by a positive, committed owner will put you in a strong position to secure the funding that you need to launch a successful franchised business.
The level of finance available from a bank will depend upon the strength of the franchise system and brand as well as the business plan you’ve produced. Typically for well-established franchises the bank will lend up to 70 per cent of the total set up costs including working capital. For newer, less established franchise systems the amount of finance available maybe lower.
The bank will probably require security for the loan which commonly will be a legal charge over a residential property with sufficient equity. Don’t be put off they isn’t any security to offer the bank. The Government backed Enterprise Finance Guarantee Scheme maybe available for those who have a strong business proposal, but who lack security that the banks usually require.
It is sensible to have a contingency reserve fund to fall back on in case the business takes longer to get off the ground than originally anticipated.
Lloyds Banking Group continues to approve 80 per cent of customers’ requests for loans and overdrafts, and we have a range of funding options available, which includes “Lloyds Funding for Lending.” This utilises the Government’s Funding for Lending Scheme, and enables businesses to benefit from lowered funding costs on loans and offers a one per cent reduction in the interest rate for new business loans.
Once you have established a relationship with your bank and secured the necessary financial support, it is important to build on this and keep regular communication channels open. Offering regular updates around the progress of your business breeds confidence in your ability to manage your business in the current trading environment.
Self-employment can be a daunting prospect, but hard work, determination and a large amount of common sense will take you a long way towards achieving your business goals. If you set realistic goals and undertake a meticulous planning process, once you have delivered your business plan with confidence and answered all questions knowledgably, you have the basis for a successful relationship with your bank manager as you look to expand into franchising.
It is essential to thoroughly research the opportunity and fully consider the financial implications before buying a franchise. You are entering into a long term commitment and need to get the funding right at the outset. Don't try to press ahead with insufficient capital, putting unnecessary pressure on the business from the outset, but don't borrow more than you can comfortably afford to repay.
How to legally purchase a franchise resale
By David Kaye, Harper Macleod
When a party agrees terms to buy a trading franchise business it is not as straightforward as simply signing a new Franchise Agreement or taking over the remaining years of operation of the existing one.
Instead the seller and purchaser having reached an agreement on price and other key terms and having the consent of the Franchisor must go through a legal sale and purchase process. There will need to be a Sale and Purchase Agreement. This is needed where a purchaser will be buying the business, assets, stock etc and/or where employees may transfer across to the purchaser whether by law or by agreement with the seller. If the purchaser is buying the shares of a company owned by the seller that operates the franchise then a share purchase agreement will be necessary.
Sale and purchase agreement: Often the franchisor has its own template being a pre-drafted agreement that contains the main terms of the agreement already in place. Whilst this can save time and expense it will often not give a purchaser the protections that it may require. For example, if employees are transferring because the business is being acquired as a going concern there are protections that a purchaser would want to build into the agreement to avoid liability for any claims arising in the period before the Business changes hands.
The content of the agreement would typically be as follows.
- Interpretation: the definitions for all major terms used in the overall body of the agreement are set out here.
- Purchase and sale of equipment, assets, stock: Details the purchase price, any purchase price adjustments, allocation for tax purposes between the parties and a dispute resolution mechanisms.
- Representations and warranties of the seller and purchaser: Provides all statements that the parties are signing off to be true. The seller has the chance to disclose anything relevant to the statements to avoid a claim at a later stage by the purchaser that a matter is incorrect or untrue. This is called a Disclosure Letter.
- Matters related to employees: Provides terms on how employee benefits and any accrued bonuses should be handled post transaction
- Indemnifications: Provides details of all indemnifications for any costs that may arise post transaction because of conditions that existed prior to the purchase and sale completing.
- Tax matters: Specifies any special tax treatment
- General clauses: various standard protections for the parties including Confidentiality and Governing law.
- The sale of a franchise can be a three-party affair with the franchisor often also agreeing to the purchase by countersigning the sale and purchase agreement, along with the purchaser and the seller.
It is therefore very important that you engage a lawyer who not only has franchising experience but also has dealt with purchase and sale agreements. You should also obtain tax advice from a qualified accountant before reaching an agreement to purchase a Business or shares in a company.
Cost of using a franchise solicitor
The amount that a solicitor will charge you for this work will depend upon how complex the transaction is.
It is not really possible to give a meaningful estimate of the cost without full details of what the transaction will involve. Suffice to say that the cost will be appropriate to the value of the deal and without such advice you risk losing a substantial amount. It is however vital that you always seek legal advice for buying a franchise resale.
Even if the current franchisee tells you that they used a solicitor so you do not need to, you must still take legal advice from an experienced franchise solicitor; it is essential that you always use a lawyer who specialises in franchising and is a member of the British Franchise Association.
Franchise resale legal advice
by Martin O’Neill – Solicitor, Wright Johnston & MacKenzie LLP
Prospective franchisees sometimes have the choice between buying an existing trading business from a franchisee, or starting a new business with the grant of a franchise from the Franchisor.
If you are buying an existing business then some additional legal documentation will be required, beyond the Franchise Agreement and its related documents.
Businesses are generally acquired in one of two ways. Either 1. the entity that operates the business sells the relevant assets to the buyer, or 2. the entity operating the business is itself acquired.
It is very common in the UK for a franchisee to be a private limited company. For the purposes of answering this query we are assuming that relevant parties are private limited companies, although franchisees could be, for example, sole traders, partnerships, or limited liability partnerships (LLPs). Private limited companies are acquired through a transfer of the company’s share capital.
There are a number of factors which influence whether buyers and sellers want to proceed by way of a share sale, or an asset sale. These can relate to legalities, accounting, tax, or other practical considerations.
In addition to a Franchise Agreement, a franchise “resale” will require a purchase agreement. This will either be a Business Purchase/Asset Purchase Agreement, or, in the event that the buyer is buying the existing franchisee entity, a Share Purchase/ Share Sale Agreement.
Other relevant documents may include (amongst others):
- Confidentiality Agreements - obliging one or more parties to keep confidential information confidential.
- Exclusivity Agreements - aimed at preventing a seller speaking to interested third parties for a period of time whilst negotiations are ongoing with the prospective buyer.
- Due diligence questionnaires - seeking information on the business and/or entity to be acquired.
- Disclosure documents - used by the seller(s) to disclose information against the warranties contained in the purchase agreement.
- Board Minutes - noting authorisations in respect of transactions and changes to relevant entities.
- Shareholder resolutions
- Consents from relevant parties such as the Franchisor, landlords and lenders
- Release agreements - freeing an outgoing franchisee from its Franchise Agreement (with some important exceptions!))
- Stock Transfer Forms - detailing the transfer of ownership of shares.
- Resignations and appointments of directors
- Agreements relating to employees and directors
The above list of documents is not exhaustive and of course not all of these documents will be relevant to a particular transaction. When provided with the relevant information in respect of your intended purchase or sale, a franchising solicitor will be able to provide you with a breakdown of the costs involved in respect of the various documents required.
An experience of the franchise industry will mean your adviser will be able to help you navigate through the sale process with confidence, and provide franchise specific commercial guidance beyond the legal technicalities.
Valuing a franchise resale
The sale and purchase is based on the value of the assets and goodwill of the business. Normally, the value of the assets is based on their realisable value i.e. what the assets could be sold for in the open market, whereas goodwill is normally based on the future profit potential of the business.
The price is the amount that a willing buyer will pay to a willing seller. Often this is a multiple of the business profit but getting to the right multiple is the skill and will vary from industry to industry.
An investor purchasing a resale should expect to recoup their initial investment together with a return based on the increased value they achieve for the business during their period of ownership.
A starting point is to look at the return on investment; if you are looking for 20% (to reflect the risk of investing in the business) then this would equate to a multiple of 5 times profit (i.e. you might invest £200K for a return of £40K).
It's never as easy as this in practice as you need to look at the maturity of the business, its dependence on key customers or staff, the assets employed and so on. If you need help in valuing a business you can take advice from an experienced bfa afffiliated accountant.