3 Things You Need To Know Before Purchasing An Existing Franchise
Follow these tips to ensure that the prospective benefits do not turn out to be eventual liabilities
The report - Overview of Franchise Industry, published by The U.S. Commercial Service, states- The franchise market in India has the potential to grow to $20 billion by 2020. Franchising in India is growing at an impressive rate of approximately 30% per year. Presently, there are 1,200 franchisors in India, of which 25% are of international origin, with U.S. companies the most prevalent.
Approximately 1200 franchisors, 40,000 franchisees spread across the country are successfully operating in diversified industry sectors including healthcare/beauty (3%), IT enabled services (14%), IT education (40%), Education -preparatory and fashion (10%), professional services (11%), retailing (9%), Entertainment (4%), F& B (2%), Cyber Cafes/Kiosks (2%), and miscellaneous services (5%).
Every day new franchise businesses are being launched in India. There is a lot of enthusiasm about franchising today and individuals and companies appear keen to launch the next franchise, on a daily basis.
On the other hand there are those franchises that have been in business for long and are now looking for moving on or retire.
As an independent franchise consultant and CA with more than 30 years of experience, Amitabha Banik, deals with both those who are willing to start their own business, and others who tremble at the idea of starting from scratch, and look solely for business opportunities with existing and steady cash flow, fixed customer base and team. “Buying an existing franchise with the above elements does not ensure greater success than the one that buys a new business. Moreover, it has also been seen that the apparent benefits of existing franchise turn out to be future worries,” he notified.
If you too are looking for buying an existing business, follow these tips to ensure that the prospective benefits do not turn out to be eventual liabilities -
Existing Cash Flow
Start with a thorough inspection of the financials. While purchasing an existing business, could be nothing as important. Though it is imperative for buying both new and existing businesses, while negotiating an existing business, it’s even more critical.
We all know that profitable businesses are hardly advertised for sale. According to Banik, they are usually sold off to family members or friends. “Even when we see such businesses being put up for sale, the owner often inflates the asking price. He intends to get something he thinks is fair. However, in reality it is often found that the books and accounts he has don’t do justice to what he is asking,” he elaborated.
It is also important to consider the additional benefits associated to the business which is often not reflected in the bottom line. One good thing about purchasing a franchise is that, there is a franchisor that can authenticate the weekly sales that the business is doing. This is because the franchisor collects percentage from the sales regularly.
Existing Team Members
Buyers often get thrilled at the fact that the business comes with existing employees who are trained and know the business well. However, it is extremely crucial to find out if they are happy employees. Other important questions to be asked are if they want to continue with a new owner, if they are skilled enough to support the business you want to build in future.
“The buyer may presume that he/she will be able to know about the employees before the deal, but, often the sale happens in private as the owner is reluctant to let the staff and customers know about it, to keep the business safe from disruption. Do ensure that you receive all relevant and significant information about the workforce before signing the agreement,” warned Siddharth Pansari, Director, Primarc Group.
Established Customer Base
Shankar Mondal, Founder, Deep Publication, recounted the story of meeting a previous business owner who sold his very successful designing business.
While making the deal the buyer was thrilled about the booming venture, but little did he know that the business was so flourishing because the customers loved the owner. As the new owner came in the scene, the clients started to wander off. The new owner was left with the uphill task of acquiring new clients while spending huge amount of time and money to hold on to the existing ones.
Understanding the customer base is a critical cog in purchasing a resale venture. One needs to figure out whether it is the product and service that is behind the success of the venture or is it a customer-relationship based business in which the clients are in love with the owner.
“In case it is the latter and the buyer is unsure about being equally adored, it is better to reassess the proposal. The buyer can also ask the former owner to stay active which in turn will keep the committed customers active in the business for a certain period,” Mondal suggested.
The ideal scene, while negotiating a resale business is where the owner is keen to give up work, ready to bargain on the price, and has a very good workforce which has been working with him for long. Banks also prefer giving loans to resale deals as it has cash flow. However, one needs to analyse the deal thoroughly and be aware of what he/she is getting.