Buying a failing franchise

When looking to buy an existing franchise, there are two types of businesses for sale – those businesses which are successful and those which are underperforming.  However, whilst a performing franchise will bring with it many benefits, and probably a hefty selling price, you shouldn’t be quick to rule out a franchise that isn’t successful or losing money.

To reduce the risk associated with buying an underperforming franchise business, you need to firstly identify why the business is failing, is it franchisee negligence or external factors that are out of the current owners control, and ultimately, can it be turned around to be sustainable long term. 

Identify potential reasons for business failure

Firstly, identify what the motivation is for the owner to sell now? Are they looking to retire or maybe relocate and happy to take what the business is worth? Or are they escaping problems such as employee issues?  Long hours with little rewards?  Could they be aware of any forthcoming changes that could impact their business?

The biggest indicator of success is financial performance.  Ask to see the company’s business accounts for the past few years. Look at any trends i.e. peaks and dips and identify the reasons for these.  Is it a seasonal business? Does the business rely on the presence of the owner and dip when the owner is absent? Has other businesses opening affected activity for you?

Find out more about the employees (if the business employs staff). Are the staff happy?  Do they need retrained? Could a new owner change staff morale in the business?  Would the staff stay if asked?

If location is crucial for the success of the business, you need to make sure you identify any proposed changes to - continuation of the lease agreement, new competition, any planning permissions submitted to the council that could impact the business further or planned road works that could have a negative impact on the business.

It is worthwhile asking the franchisee point blank if they know of anything that hasn’t been disclosed that could hinder the future potential of the business.  It is also worth seeking legal advice as they may be able to include any responses in the legal purchase agreement.

It is also vital that you understand the business model and investigate the franchisor, treat the research as if you are looking to open a new unit from scratch. It will also give you further ammunition for asking the franchisee the right questions, and the franchisor should also be able to confirm from their responses if the seller is giving you accurate information.

Franchisee negligence

You may find that a big reason for the business underperforming is simply down to the franchisee and the fact the business may not be right for them.  Picking the wrong business and having to do work you don’t like doing day in and day out can be daunting and demotivating.  This can lead to stage where you are stuck in a rut and resent having to turn up for work each day.  This would have a massive impact on the business. 

Or the franchisee may have had a change in personal circumstance such as ill health, which would also affect their ability to run the business. 

But the good news for the buyer is that in both these circumstances, the fortunes of the business could be turned around.  You do however need to ensure yourself that that the business is RIGHT for you; doing your research into the franchise company and speaking to other franchisees will help you to determine this.

And if you believe you can make the business a success, a major benefit of an underperforming franchise is that you should be able to get the business for a good price; you should only pay a nominal sum or a price that reflects the values of the assets being transferred.  And if you are not getting offered a good price but are very keen on the business model, you can always go to the franchisor to discuss buying a new franchise business direct from them.

Turning the business profitable

So, equipped with all this information, you need to now ask yourself, would a change in ownership fix any problems you have identified? Knowledge is power and so the more information you can gather will help you to answer this. 

So how do you help the business to be a success?

  • Make sure you have sufficient working capital – lack of funds to keep the business is running is a major reason for business failure.                                                                     
  • Change the proposition of the business – if whatever the current franchisee is doing isn’t working, then you need to look at how the business is positioned and promoted to the community.  What can be changed to make it a more attractive offering to customers?  Do you need to undertake additional marketing?  Or more appropriate marketing for your target market?
  • Meet your customers – restore their faith in the brand and let them know that you are committed to the business and making it an integral part of the local community. Market the business like crazy!
  • Reconnect with the franchisor – most failing franchises don’t reach out to their franchisor for help until it is too late. Franchisors are there to support you and by reconnecting with them, you can form a new relationship that starts of positively from day one.
  • Be prepared to work hard – as obvious as it sounds, some franchisees may enter a franchise relationship not understanding their role in the business and the fact you need to be prepared to put in as many hours as required.  This is your business, no one else will be as committed as you.
  • Poor staffing choices – as mentioned earlier in the article, staffing issues can hinder the success of a business.  Bringing in your own staff could combat this. Staff recruitment and training can be a worthwhile investment in the long run; cutting corners will only incur costs at a later date.
  • Plan, plan and plan some more! – the existing franchisee may lack planning skills and could have been firefighting problems as they arose.  Adequate planning and a comprehensive business plan can help you to combat many issues as well as giving you clear focus for the running of your business.

Any necessary changes you are making should be implemented before opening your doors for business. This lets your customers know you are serious about making it work and learning from the mistakes of the previous owner.

So, if you are willing to do the research into the failings of the business and happy to put in the effort required to turn the business around, buying an underperforming franchise could be a great business opportunity for you.