The Pros and Cons of Franchise Resales
Buying a ready-made business comes with some perks -- and possibly obstacles.
For those looking to go into business ownership, franchising offers plenty of advantages over starting an operation from scratch. Thanks to proven business models, training and ongoing support provided by the franchisor, entrepreneurs can establish their own operation with less risk. It's been established that there are roughly three ways to go into business by yourself: you can start from scratch and build a business from the ground up, pursue a franchise concept or explore the possibilities that come with buying an existing franchise operation — which might lessen the overall risk of small business ownership even more. For those considering the purchase of an existing franchise — or resale — here are some pros and cons to consider when investigating the existing business marketplace.
Pro: inheriting an already successful operation
With everything already in place — including operations, systems, staff and vendor/supplier relationships — you can skip the onboarding process. Getting a franchise operation off the ground and running it is no small feat, and hopefully the business will have surpassed the current owner's breakeven point. There's no site selection options to consider, leasing terms to negotiate and — best of all — possibility of inheriting an already existing customer base.
Con: inheriting a mess
When giving franchise resales the initial once-over, it's unclear precisely what you may be inheriting. While all of the aforementioned advantages paint a pretty picture about a successful business, it's also possible that it's anything but. For all you know, the current owner might not have done an adequate job running the franchise. Perhaps the walk-in traffic needed to support the franchise hasn't materialized enough to hit breakeven numbers. The business could conceivably be in financial trouble, and the sale was just an opportunity for the owner to bail out of a financial mess. Which brings us to the one question that must be asked above all else: why is the current owner looking to sell? Regardless of the answer you get, never fail to request and examine the books behind the operation. If the current owner isn't forthcoming with the operation's financial performance and information, you can probably guess the reason why.
Pro: the selling price is always negotiable
Because you aren't buying a franchise for the first time, you won't be responsible for the franchisor's initial franchise fee, which, in most cases, is non-negotiable. An existing operation is already down the road, but still responsible for meeting the terms of their monthly royalty payments. As a prospective buyer, you can make your own reasonable offer. However, as with any negotiation, the final sale terms are often up to the seller.
Con: the selling terms may not be favorable
Before you can get to a specific dollar amount, you'll need to find out about the current owner's existing obligations with the franchisor. Does the franchisor get the first right of refusal to buy back the business? Do they intend to? Do your due diligence as it pertains to the existing franchise agreement and find out whether those terms will also be applied to you as the new owner. The fees and terms for a resale, including fees and royalties, could actually differ extensively from the original deal. Get the specifics on transfer fees, any costs related to your orientation as the new owner and any prerequisite training required. Don't forget to factor in the cost of any improvements needed to keep the franchise operation running.
Pro: built-in customer base and reputation
Assuming that the current franchise owner has done a decent job marketing the business, you might be inheriting a built-in customer base and an operation with a great reputation. If the business is in a favorable location, and has met the expectations of the local target market, stepping into a resale opportunity could be a walk in the park. Reviewing the franchise owners' financial records should be enough to determine the level of success. If you don't have to hit the bricks on day one to generate customers, it could be smooth sailing.
Con: overcoming a bad reputation
If the establishment did not meet the expectations of the local target market, you could be facing an uphill battle that could be difficult to turn around. Bad reputations, even if the establishment is under "new management," may not be enough to right the ship. You'll want to do some validation, not just with other franchisees in the system, but possibly the customer base as well. Spend as much time as necessary to get a read on the establishment's online reviews. Five stars – no problem! Less than three stars? Gulp. As Jerry Seinfeld used to say, "…good luck with alllll that."
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