Are you contemplating the purchase of an established franchise through a franchise resale, as opposed to starting a new one from scratch?
You’re not alone! Acquiring resale franchises offer numerous advantages, such as an established customer base and staff, as well as the potential for immediate profitability.
However, before you proceed with buying established franchises through a franchise resale, there are several important factors that you should consider.
In this article, we will explore six reasons why it is crucial for entrepreneurs to thoroughly evaluate resale franchise opportunities before making a purchase.
So, if you’re ready to delve deeper into buying or franchising an existing business, let’s begin!
What is a franchise resale?
A franchise resale refers to the process of selling an established or existing business to a new owner. In this scenario, the current franchisee (the current owner) decides to sell the unit to another interested individual or entity, who will then become the new franchisee and take over the business’s operations.
This can occur for various reasons, including:
- retirement,
- relocation,
- or a desire to pursue other businesses.
In franchise resales, the buyer typically pays the asking price for the existing business, which generally includes the license, existing operations, and any associated assets or inventory.
It is crucial for the prospective buyer to conduct thorough due diligence before making a purchasing decision. This involves reviewing the franchise agreement, financial and accounting records, and other relevant information about the business to ensure it is a sound investment.
Additionally, obtaining approval from the franchisor may be necessary before finalizing the transfer of the agreement for existing franchises. Going through the provided checklist is recommended to assess the existing operation.
Evaluate the franchisor
- Examine the FDD (Franchise Disclosure Document)
- Communicate with the corporate staff.
- Conduct due diligence by contacting existing franchise business owners.
Communicate with the current owner and ask the following questions:
- What is the current owner's reason for selling?
- Is the unit successful?
- What has the financial performance of the franchise been like in the past year or two?
- Does the current location have key employees, and if so, how likely are they to stay with the business when you assume management?
Inquire about the physical location:
- What is the status of the current lease?
- Will any equipment require replacement in the near future?
- Have there been or will there be changes to the neighborhood demographics that could adversely impact the profitability of the business?
- Are there any planned road or area changes by the city that could hinder customer access to the business?
Why Evaluate A Franchise Resale – 6 Reasons!
To gain a better understanding of the franchisor:
Even when considering buying a franchise resale, remember that you will ultimately become a franchise owner under the established franchise location or independent business owned by the franchisor.
As mentioned in the checklist, your evaluation process should begin as if you were purchasing a new franchise. This involves evaluating the FDD, speaking with existing franchisees in the system, and learning about the training and support provided to existing franchises by the franchisor.
It would be advisable to decline the franchising opportunity if you don’t feel a connection with the corporate staff or if the culture of the current franchisees doesn’t seem to align with your goals.
To know the seller’s motivation:
The reasons behind a seller’s decision to sell an existing franchise can vary, including illness, retirement, or pursuing other opportunities. It is essential for potential buyers to investigate the seller’s motivations and determine if they align with the current state of the franchise system.
Buyers should be cautious of sellers or companies that conceal poor business performance or mismanagement issues. Thorough due diligence is necessary to ensure an informed decision, and understanding the seller’s motivation is vital for determining the business’s value and negotiating a fair sale price.
To assess the business’ performance
Evaluating the performance of the business is crucial when considering the purchase of an existing franchise or franchise resales. The price you pay should align with the business’s financial performance. Profitable businesses or franchise resale opportunities would command a higher price, while a struggling unit would be valued lower.
Assessing the performance of a system involves several steps to gather relevant information and analyze key factors, such as follows:
Obtain financial statements:
Request financial statements from the seller, including balance sheets, income statements, cash flow statements, and tax returns for the past few years. These documents provide a comprehensive overview of franchise businesses’ financial health.
Review revenue and sales figures:
Analyze the revenue and sales figures over a specific period to understand the business’s growth and sales trends. Look for consistent growth, stability, or any significant fluctuations.
Examine profitability indicators:
Evaluate profitability indicators such as gross profit margin, net profit margin, and operating profit margin. These indicators help assess how efficiently the business generates profit and manages its costs.
Assess cash flow:
Review the cash flow statements to determine the cash inflows and outflows of the business. Positive cash flow is generally preferred, as it indicates the business’s ability to generate sufficient cash to cover expenses and investments.
Analyze expenses:
Scrutinize the business’s expenses, including fixed costs (rent, utilities, salaries) and variable costs (materials, supplies). Identify any excessive or unexpected expenses that may impact profitability.
By following these steps and conducting a thorough analysis of the business’s financial performance, you can make an informed decision about its viability and potential for success.
To assess the employees
Assessing employees is an important aspect of evaluating an existing franchise. Here are some reasons why assessing employees is important:
Skill and expertise
Assessing employees allows you to understand the skill sets and expertise within the business. This helps determine if the current employees possess the necessary qualifications and experience to effectively run the franchise. Skilled and knowledgeable employees can contribute to the smooth operation and success of the franchise business.
Staff stability and continuity
Evaluating the current employees provides insights into their stability and continuity within the business. Understanding the tenure and loyalty of the employees can indicate their commitment to the existing franchise business and their willingness to stay on under new ownership. Retaining experienced and dedicated employees can minimize disruptions during the transition and maintain customer relationships.
Training and development needs
Assessing employees helps identify any training and development needs that may exist. It allows you to determine if additional training programs or resources are required to enhance the skills of the workforce. Investing in employee training can improve productivity, customer service, and overall performance.
Employment contracts and obligations
Evaluating employee contracts and obligations is essential to understand the terms of employment, such as compensation, benefits, and non-compete clauses. It ensures compliance with legal requirements and provides clarity on any potential contractual obligations or limitations that may impact the business.
Employee relations and morale
Assessing the relationship between employees and the current owner can offer insights into the overall work environment and employee morale. Positive employee relations and healthy work culture can contribute to higher job satisfaction, productivity, and customer satisfaction. Conversely, strained relationships or low morale may require additional attention and efforts to improve employee engagement.
Transition management
Assessing employees allows you to plan and manage the transition effectively. Understanding the roles and responsibilities of each employee facilitates a smooth transfer of duties and ensures a seamless continuation of operations. It also helps identify any staffing gaps or potential restructuring needs.
To know the status of the lease/inventory:
Inquiring about the lease, its duration, and the possibility of transferring it to the new franchise owner is crucial. Additionally, if purchasing equipment, supplies, and inventory, obtaining a detailed list of each item and checking their condition and purchase price is important.
Whether the equipment was purchased or leased, understanding its value for the sale is essential. All this information helps determine an appropriate price for buying an existing franchise, as there is no fixed price for financing such transactions.
Considering other significant factors
Apart from the aforementioned reasons, there are so many factors that can influence the current value and future profitability of owning the business.
Competitive Landscape
Assess the competitive landscape in the area where the franchise is located. Identify the presence of direct competitors as well as indirect competition that may offer similar products or services. Evaluate their market share, pricing strategies, and overall competitive advantage. Understanding the competition can help you determine the business’s ability to attract and retain customers.
Marketing and Advertising Strategies
Evaluate the effectiveness of the current marketing and advertising strategies employed by the franchise. Consider the franchise brand’s visibility, online presence, social media engagement, and overall marketing efforts. Assess the franchise’s ability to reach and engage its target audience and its potential for future marketing success.
Customer Satisfaction and Reviews
Look into customer satisfaction levels and reviews of the franchise. Analyze customer feedback, ratings, and reviews from online platforms and other sources. Positive customer satisfaction indicates a strong customer base and can contribute to future growth and profitability.
Lease Agreement and Real Estate
Examine the terms and conditions of the lease agreement for the franchise’s established location. Consider the duration of the lease, rent escalations, and any restrictions or obligations imposed by the landlord. Evaluate the stability and suitability of the real estate in terms of customer traffic, accessibility, and long-term potential.
Online Presence and E-commerce
Assess the franchise’s online presence and its capability to engage in e-commerce activities. In today’s digital age, having a strong online presence and the ability to reach customers through e-commerce platforms can significantly impact business success and profitability.
Future Industry Trends and Innovation
Stay updated on emerging industry trends and innovations that could affect the franchise’s long-term viability and profitability. Consider technological advancements, changing consumer preferences, and market shifts. A franchise that embraces innovation and adapts to evolving trends is more likely to thrive in the future.
There are numerous business industries in the US that offer franchise opportunities across a wide range of sectors. Some of the popular industries for franchising include:
Food and Beverage: It includes fast food chains, casual dining restaurants, coffee shops, ice cream parlors, pizza outlets, and other food and beverage establishments.
Retail: Examples include clothing and apparel stores, convenience stores, automotive parts and repair shops, pet supply stores, and home improvement retailers.
Senior Care: These can include home care services, assisted living facilities, senior care placement agencies, and medical staffing services.
Automotive: Franchise opportunities are available in the automotive industry, including auto repair shops, car washes, auto detailing services, and automotive maintenance centers.
Cleaning and Maintenance: This sector encompasses franchise service businesses in commercial cleaning services, residential cleaning services, carpet cleaning, window cleaning business services, janitorial services, and property maintenance.
These are just a few examples of the business industries in the US that offer franchise opportunities. It’s important to research and evaluates specific franchises within these industries to determine which aligns with your interests, goals, and financial capabilities.
Final Thoughts
When purchasing a franchise resale, remember that you can negotiate the price with the seller and the franchisor, and you also have the option of buying a new franchise, often at a similar or lower cost. You should not feel obligated to accept the seller’s price.
Ensure you research franchise resales and consult with a franchise consultant to determine if the franchise resales price is reasonable before making any decisions. A thorough evaluation of the current business will provide you with the information needed to make the best possible decision as the new owner of an established business, benefiting both you and your future clients.
Considering all these factors, from understanding the seller’s motivation and evaluating employee contracts to assessing projected neighborhood changes, significantly increases the chances of business ownership success.
Bonus Read: “Are Franchises Bought, Sold Or Awarded?”
