Buying an Existing Franchise
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Q: I've been looking at various franchise opportunities, and I think I've finally decided. As it turns out, the franchisor has informed me that there's an existing franchise available for me to buy. Is this a good idea? Is there anything I should be concerned with? How does buying an already operating franchise differ from buying a new franchise?
A: Many already operating franchise locations routinely come on the market. Sometimes the franchisee has successfully operated the business for many years, and wants to retire, take the proceeds from the sale of the business and move to a place where the sun shines every day. Maybe they don't have any children who want to take over the family business, or maybe, and this does happen, the business hasn't been profitable and they need to get out and find a job. But assuming it's one of the first two reasons that fit the business you're looking at, buying an existing franchise has some real advantages over starting from scratch.
The first advantage is the business is already up and running. Not only do you not have to go out and find a site, you don't have to go through the hassle of hiring architects and contractors to build it out. The staff, if you're lucky, is already in place and trained, and the business has an existing customer base and hopefully a great reputation in the community. Inventory is already in the store and all your vendor relationships are in place. The bottom line is, you can be up and running a lot sooner than if you had to start from scratch.
Do Your Homework
You have another major advantage. When you become a franchisee, normally you don't know what your franchise will earn because most franchisors today don't provide any information to new franchisees on unit earnings in their system. Even if your franchisor does provide an earnings claim, there's no guarantee your new location will match the performance of other locations in the system. With an existing operation, you get the chance to review the books and records and make a determination based on real numbers in an operating location. Even if the numbers are great, however, you should dig for more information. Here are a few things to determine:
- Find out why the franchisee is leaving the business.
- Find out if the existing staff, especially the managers, will be staying. If you're counting on having a staff ready and trained, you need to be sure.
- Find out if the trends for the business are still as strong as in the past. Is the market drying up?
- Check out the location. Has the neighborhood started changing? Are there new competitors coming into the market that could affect future performance?
Make sure you look at the location as if you were starting fresh. After all, if the business has been on a decline for the past several months or years, there's no guarantee you'll be able to turn it around. Don't make the mistake of assuming that just because you think you'll work harder or smarter than the prior owner, you'll have better performance.
Remember, although you're buying what to you is a new business, your franchise agreement may be different than the one currently being offered to new franchisees by the franchisor because you may be assuming an existing franchise agreement. If the fees in the existing agreement are lower than those currently offered to new franchisees, you're in luck. But that may also mean the length of time left on your agreement will be less than the full term. You need to determine exactly what you're agreeing to.
Some franchisors will allow you to assume the existing franchise agreement. Others will require you to sign a new franchise agreement based on the current agreement offered to others in the system. Still others may require you to sign a new agreement but only let you have the remaining term of the existing agreement. As with the purchase of any franchise, it would be smart to have a qualified franchise attorney assist you in evaluating the franchise agreement.
Most franchisors won't require you to pay a new franchise fee, but most will charge a transfer fee to either you or the selling franchisee. (It really doesn't matter who pays the fee, because it will probably be built into the price if the selling franchisee is required to make the payment.) The franchisor usually charges the fee to defray the administrative costs resulting from the transfer or to pay for other new franchisee support costs. Some don't charge a separate fee for providing training, but others will ask you to pay that cost as well. Depending on the franchisor, some of these fees may be negotiable.
Obviously the purchase price for the business will be negotiated between you and the existing franchisee. You should have your accountant or lawyer review the numbers and help you assess whether the price is right. Keep one thing in mind-almost all franchise agreements give the franchisor the right of first refusal when an existing franchise is sold. They usually only have to match your written offer and often have 30 days or longer to make their decision. Before you spend too much time and money on professional fees and due diligence, ask the franchisor if they plan on buying the business. If they say no, get it in writing. It could save you some disappointment and expense.
If the deal falls through but you still want to buy an existing franchise, only this time from another franchise system, there are resale networks that regularly post existing opportunities. Probably the best known is the Business Resale Network. You can also check out the U.S. Business Exchange for an online database of small to medium-sized businesses for sale.
Buying an existing franchise is a great idea. It has a host of benefits. But, just as with any business opportunity, you have to do your homework before investing any money.
The opinions expressed in this column are those of the author, not of Entrepreneur.com. All answers are intended to be general in nature, without regard to specific geographical areas or circumstances, and should only be relied upon after consulting an appropriate expert, such as an attorney or accountant.
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