Own a Franchise Resale
Investing in a franchise resale can have a number of advantages over starting a new franchise from fresh. 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 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.
hen looking to buy a franchise opportunity, whether or not it is a franchise resale, you must discover which category the franchise you are looking at 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 try something different?
- How has the franchise performed over the past year or two? What are the trends and 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 for success, what is the status of the real estate? Will there be any issues with the continuation 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 franchisors to gather further information as part of your due diligence.You should also go to the franchisor and conduct a complete investigation of the franchise just as if you were going to launch a new franchise territory.
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.If the business is currently successful, the valuation should be straight forward considering you have existing earnings to refer to. The best method is to a multiple of the net cash flow you will receive from the business.Most franchisees run expenses through their business that are not really required to operate the business. These can be expenses like company cars, meals and entertainment. There might also be extortionate salary costs associated with the owner. Take the net income of the business and add back these unnecessary expenses to determine the true net cash flow you can expect.
The price of this type of successful business should be about two to five times its net cash flow number. The more stable and dependable the cash flow, the higher the multiple that is reasonable for you will be. The multiple is also higher when the trends of the business growth are positive rather than flat or negative.The second type of resale, when the business is not currently performing so well, is more difficult to calculate a price for. 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 will rectify the problems.The only time this is true is when the existing owner is not operating their territory according to the model designed by the franchisor. If you have confirmed that most or all other franchisees following this model are doing fine and have determined there are no other problems related to – for example a bad location – then you can proceed with confidence.
The Ashtons Franchise Consulting (AFC) Franchise Sales & Resales Service
Chris Davies and Paul Davies will personally manage each franchise sale and resale project from the initial enquiry, offering advice and guidance through to a successful sale. Whether you wish to become a single unit franchisee, a multi-unit franchisee or a master franchisee, Chris and Paul have the experience and contacts to assist you with your franchising aspirations.To view our latest franchise resale opportunities, please click here.