Investing in a franchise resale can have a number of advantages over starting a new franchise as a start-up business.
A franchise resale represents an opportunity to invest in not only a proven concept but a proven up-and-running business with an established customer base that still benefits from the training and on-going support of the franchisor.
Franchise opportunities being offered for resale usually fall into two categories – those that are performing well and are profitable; and those that have not been as successful for their current franchisee. Both can potentially represent a good opportunity, however, the risk associated with the second may be greater.
When considering purchasing a franchise resale opportunity, you must identify and fully understand which category the franchise you are considering falls into.
In order to do this, you need to obtain answers to specific questions including:
- Why is the business being sold? Is it because the current franchisee wishes to retire, due to ill health or wants to start a new business in a different market?
- How has the franchise performed over the past two to three years? What are the trends and performance of the franchise and, importantly, what are the reasons given for these?
- What is the status of the employees of the franchise? How important is retaining key employees to continue producing future projected results?
- If the franchise is dependent on its site location for success, what is the status of the real estate? Will there be any issues with the continuation & re-assignment of the lease?
- Is there anything that has not yet been disclosed to you that might hinder the business? Make sure to ask this question directly so that your solicitor can include the answer in the purchase contract to protect you.
The above information is important and the answers to these questions will have a significant influence on your final decision.
When undertaking your research, you will need to talk to both the seller and franchisor to gather further information as part of your due diligence.
In addition, you must also meet the franchisor and conduct a complete investigation of the franchise just as if you were going to launch a new franchise territory.
Attend Franchisor Discovery Events. Gain a strong understanding of all aspects of the Franchisor’s business including financial health’ ethos & culture, innovation & route to market.
Do high street banks support financial backing for the franchise? Ask to meet existing franchisees to assess their experiences & successes within the franchise.
Check other aspects of the franchisee’s business – for example, their local reputation and customer service feedback. This will give you insightful information as part of your decision-making process.
Weighing up the Options
It is important that you should ask the franchisor to confirm the information that you have received from the seller. The franchisor would by no means wish for you to invest in their franchise under false pretences. If the seller is being liberal with the truth, you will often pick up clues from comments made by the franchisor. It is worth noting that as standard practice, franchisors will undertake their own recruitment and franchisee selection process regarding applications to purchase franchise territories, including resales.
Assuming the business is currently successful, the valuation should be relatively straightforward as you will have existing trading and earnings figures to refer to. The best method is a multiple of the net cash flow you will receive from the business. Some franchisees run expenses through their business that you potentially may not be required to operate your business. These could be expenses such as company cars or specific business loans. Consider the salary costs associated with the current owner. Take the net income of the business and add back any unnecessary expenses to determine the true net cash flow you can expect.
The price of this type of successful business should be between two and five times its net cash flow number. The more stable and dependable the net cash flow, the higher the multiple that you can reasonably expect to pay for the franchise. The multiple is may also be higher when the trends and forecasts of the business growth are positive rather than flat or negative.
With the second type of resale, when the business is not currently performing as well, it is more difficult to calculate a purchase price. The existing owner will always have many good arguments about why the business is not performing as well as it should, but ultimately it comes down to whether you are convinced that a simple change in ownership can rectify the problems and give you a real opportunity to build a profitable business. The only time this is true is when the existing owner is not operating their franchise territory according to the model designed by the franchisor. If you have confirmed that most or all other franchisees following this particular model are performing well and are profitable, and you have determined there are no other problems related to – for example, a poor location – then you can proceed with confidence.
The AFC Franchise Sales & Resales Service
Charlie Dickson, Franchise Consultant at Ashtons Franchise Consulting, is well placed to manage franchise sales or resale projects from the initial enquiry, offering advice and guidance throughout the process to achieve a successful sale/purchase. Whether you wish to become a single unit franchisee, a multi-unit franchisee or a master franchisee, Charlie has the skills, franchising experience and the relationships to assist you with all your franchising aspirations.