Franchise resale considerations
Cathryn Hayes, Head of Franchising, HSBC
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:
- 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?
- 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?
- Assess the market in that area, what is the competition, has something changed which will affect the business (high street pedestrianisation for instance).
- 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?
- 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.
- 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.