Is an Existing Franchise a Safer Investment?
Sometimes things work out better if you can kick the tires. If you're in the market to purchase a franchise, first consider this advice.
Katie Bauer, 30, sits at a wrought-iron table in her KaBloom florist franchise in Glenview, Ill., and points down at the "easy wash" floor she selected. "It's concrete," she says, "but it's colored gray and scored to look like slate."
Mrs. Bauer, a former corporate accountant, also picked the location for the franchise she opened in late January 2004, right between a Little Gym and a nail salon in a strip center in The Glen, a planned community in which she and her family live. "I wanted a garden look," she says, "so I chose to paint the walls sage green and beige." Behind her, a refrigerated case displays tubs of the chain's signature $16.99 a dozen roses; by her feet are rows of green plants, thriving on the faux slate floor. "I love the fact that each thing in this store was my choice," Mrs. Bauer says. "I wouldn't have done it any other way."
Nine hundred miles east in Berkeley Heights, N.J., KaBloom franchisee Krina Amin, 31, arranges Dutch hydrangeas, Casablanca lilies and gardenias into bouquets that cost up to $100 in a store designed and opened by someone else.
Ms. Amin, laid off by a Wall Street mutual-fund firm last year, turned down other floral shops for sale, "but when I stepped into this one, it was love at first sight. I didn't know it was a franchise." She worked for the previous owner while they settled on a price and took over the shop in June 2004. "I never would have invested in a new franchise, because I wouldn't have been able to review its financials," she says.
A few franchise units do change hands.
While most franchisees open up new units, a few, like Ms. Amin, for personal or economic reasons, find buying an existing franchise the better choice. FRANdata, an Arlington, Va.-based research firm, reports that 3.6%, or 11,800 of the 330,000 franchised units operating in 2002 in the U.S., were transferred to new owners.
Jeff Bevis, vice president of franchise development for Comfort Keepers, a senior-care franchise in Dayton, Ohio, says franchisees usually sell their units because of life changes--health reasons, divorce or retirement--"or because someone got into a franchise and it wasn't what they thought it would be."
Franchisers generally let their franchisees determine the selling price of their units, says Rupert Barkoff, a franchise attorney with Kilpatrick Stockton LLP in Atlanta. But they insist on vetting potential buyers just as rigorously as they do new franchisees. At Comfort Keepers, franchisees must inform their franchiser of their intentions to sell and must send potential buyers to a "Discovery Day" introductory program or other event at franchise headquarters.
Expect to pay a premium for an existing business, says Mr. Barkoff. To determine if the price is fair, call at least five other franchisees in similar markets and ask what they'd sell their units for. You can also seek advice from a local business broker who knows what other businesses have sold for in your market.
Find out why the business is for sale.
Craig Weichmann, managing partner of boutique investment bank Weichmann-Hite Partners in Greenville, Texas, says, "before advising our clients to make an investment, I want to know the reason the franchisee is selling." Sometimes, he says, a brand will become damaged goods. Just a few months ago, for example, franchisees were selling off Burger King units at what analysts called fire-sale prices. But the units were no bargain, because they needed costly renovations and banks were reluctant to lend money.
The company has recently undertaken a turnaround program. "We're in the seventh month of same-store-sale improvements and the whole system is getting healthier," says Steve DeSutter, vice president of corporate communications. "We're finding buyers who are willing and able to invest the capital needed to upgrade distressed units."
Real bargains do exist, usually when the existing franchisee is desperate to sell. While Mrs. Bauer spent $250,000 to build out her KaBloom, Ms. Amin's existing store cost less, and came with a customer base. The original franchisee, Ms. Amin says, was only 24 and didn't want to work in the store herself after operating it for seven months before she sold. "When she didn't break even right away, she couldn't afford to keep it going."
Chris Butler, 39, and his wife Tina, also 39, of Muskegon, Mich., were contacted by a local Comfort Keepers franchisee who had taken a job in the franchiser's corporate office and wanted to sell his unit quickly. "Out total expenditure was half of what a new franchise would have cost," Mr. Butler says, "and it was already making a profit."
Be aware that most mature franchise systems are no longer selling single units. Midas Muffler of Itasca, Ill., for example, reserves all expansion for current franchisees and the only way to get into that system is to buy one of its existing 1,862 units. Barb Korus, Midas's franchise-development coordinator, says that about 100 locations are always available.
Harvey Nevins, 56, of Tucson, moved to Chico, Calif., in 1980 and literally into an existing Midas franchise. "For the first three months, I slept on sheets of cardboard in the back office. When I realized it was working out, I brought my family up from Arizona and bought a house," Mr. Nevins says.
An underperforming property may be ideal.
Since then, Mr. Nevins has purchased both new and existing units--he now operates 14--and sold several more. New units, he says, cost less, but you have to hire technicians to run them. "The best deal of all," he says, "is buying an underperforming store. There's no start-up costs, no grand opening and you already have a crew and customers coming in. If you do what's necessary to improve the operation, you can increase profits right away."
Jeff Rosenfeld, managing partner of Kessev Finance, a financial-services firm in Minneapolis, says your objectives will influence your decision. If you've been laid off and want to replace your job with a franchise, it would make sense to spend the extra money for an existing unit in a mature system. But if your goal is long-term wealth, you should consider opening a new unit of an emerging brand. Then when you're ready to retire, you can sell that unit at a high resale price.
Most franchisers have lists of franchised units for sale and local business brokers may have franchises among their listings.
Ask operators of franchises you like if they have colleagues approaching retirement age. Volunteer to work in the targeted business first, as Ms. Amin did. If the retiring franchisee feels comfortable about leaving his or her business in your hands, you may even get a bargain.
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Julie Bennett is a freelance writer.