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Key Considerations When Buying a Franchise Resale

If you are thinking of buying a franchise in an established and mature franchise system, you should consider buying an existing business from an outgoing franchisee as there are many benefits to an investment of this nature – staff, customers and cash flow from the start, premises and stock in place and a proven business history to name a few.

While the benefits are clear to see, it is also important that you should not drop your guard when considering this type of purchase. All the rules which normally apply to the purchase of a franchise, apply equally to the purchase of a franchise as a going concern.

Here are the key areas you need to think about:

  • As well as your research into the franchise itself, you will also want to find out about the reasons for the sale – is the franchisee retiring, have they found that the business is not right for them, or more worryingly, have they discovered a problem on the horizon that may have a serious impact on the profits of the business (e.g. main street)?
  • Get advice from your accountant. How has the business performed, what do the audited accounts show, is the business profitable? It may not be if the previous franchisee has under performed. You need to check if this is just a one-off, or if a large number of the network is having problems?
  • Is the asking price reasonable, look at other businesses for sale in your region and again, speak to your accountant. How long will it take you to repay any borrowing to buy the business? Is that a reasonable payback period? Can the price be negotiated; are all the fixtures and fittings, equipment, stock, etc included?
  • Take the trouble to investigate both the franchise and the franchisor thoroughly. Apart from the usual inquiries, try and speak to as many franchisees as possible to get their view as to the profitability and potential success of the franchise and of the support given by the franchisor.
  • Be aware of the fact that you are not only buying a franchise but the business itself and therefore you need to make sure that upon taking over the business you will not be responsible for the liabilities of the outgoing franchisee and that the outgoing franchisee warrants the past performance of the business etc. Finally, you need to be aware that you will become responsible for all the employees of the outgoing franchisee and should therefore take steps to protect yourself against any potential liability from those employees.
  • How is the sale being structured? There are two types of sale that the franchisee can employ; share sale or asset sale. These are both very different and it is important that you understand the implications of each. Ensure you seek legal and accountancy advice before committing.
  • Do you have enough capital and security to buy into an established business? The costs will be higher than buying a brand new franchise where the concept has not been established. However an advantage of purchasing an existing business is that if finance is required you will have existing accounts to demonstrate to the bank how the business has been performing.

There is a lot to consider, but taking over an existing established franchise business could provide a quicker route to a higher return, and should be generating income from day one.

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