The strongest advantage of buying an existing franchise business is that you have a chance to examine its performance numbers. You know what the sales and expenses were in the past year--and even earlier, assuming the records are accurate (ask the franchisor to provide a royalty payment record so that you can cross-check the key sales numbers). You have an opportunity to discuss the business with the owner, interview key employees and observe the operation. You can research the industry and gain an understanding of objective valuations in that business sector. In an important sense, you also lower your investment's uncertainty . . . and your own risk.
Where will you make your money? Maybe you can identify a struggling franchise that needs a new shot of leadership and enthusiasm for the business. If you're successful, you'll build a strong business out of a weak one, and reap the financial benefits.
Buying an existing franchise business means that you're subject to the transfer provisions of the existing franchise agreement, which can be very restrictive. Many franchisors reserve the right of first refusal on all proposed transfers, so it's possible that you can end up putting a big effort into a formal purchase offer only to have the franchisor match it and take you out of the picture.
The franchise agreement might also impose a hefty transfer fee, often expressed as a percentage (5 to 15 percent) of the purchase price. This will, of course, fall on your shoulders, so include it in your calculations and your price negotiations. You might also negotiate with the franchisor on the transfer fee, especially if you're buying a troubled franchise. A new, enthusiastic owner may be the answer to the franchisor's prayers; the company may be more than willing to lower or eliminate the transfer fee altogether just to help you take over the ailing franchise.
Your major risk: hidden problems of the previous owner's making. No one likes surprises in a new venture, and these hidden problems will cost you money you didn't plan on spending. They range from unhappy supply vendors to dishonest employees to defective equipment--and they simply come with the territory. Add an "unexpected problems" line to your opening budget, and plan for the unexpected.
Some may call the act of selling a house in California, purchasing another in Florida, and buying a franchise--all within a two-month period--a midlife crisis; but for Sonja and Mike de Lugo, it was an opportunity they couldn't pass up. They had been looking for an existing franchise to purchase when a FastSigns franchise went on sale in Gainesville, Florida--an ideal location, since it was close to Mike's family.
Taking over a franchise that had been in business for seven years granted the de Lugos, both 41, a comprehensive database of existing customers who were already familiar with the FastSigns franchise--which specializes in signs and graphic solutions. However, they were also left with a negative reputation to correct, due to what Mike calls "lack of managerial enthusiasm." They immediately purchased new equipment to increase their production rate and informed the community of the change in ownership.
Though nervous about buying a failing franchise, the couple was confident in the system since two of their family members were already FastSigns franchisees and could testify to the franchisor's willingness to help. Also, Mike used his previous 20 years of experience as a general manager at hotels in the Hilton chain to his advantage. He knew the business, knew how to talk to people and had contacts, so the couple targeted the hospitality industry as primary customers.
Within eight months, the de Lugos had managed to triple the revenue from the year before; they ended 2004 with estimated sales of $800,000. The de Lugos' success has solidified their opinions about existing franchises. "There may be locations where there's not much competition and it would make sense to put in a new one," says Mike. "But it's just my own personal opinion that I would stick with the resale."