Is A Franchise Right For Me?

While considering a business purchase and shopping online "business-for-sale" sites, you’ll probably run across several franchise re-sales.   Could a franchise re-sale be in your future?  

There are several important benefits to owning a franchise which we will review below, and potentially more value when purchasing franchise resale.   

Franchise Benefits:

Branding: Name recognition, brand repetition, and consistency in product and service are big pluses for first-time business owners. Many of the fastest-growing businesses in the country are franchises. This is because of their proven systems, increasing name recognition, brand power, and economies of scale.  By purchasing a franchise, a business owner can basically skip the "start-up phase" and go right to the growth phase of the business.

Systems: Having processes and systems in place offers a new business owner the opportunity to "turn the key and go", which can be a critical factor in their success. Instead of re-inventing the wheel, franchises offer owners their "recipe for success" including location selection, which products and services sell, how to recruit and train employees, where and how to order products, how to advertise, keep books, etc.

Support and Training: Franchises offer new owners support in the form of comprehensive training on their model, processes and systems. Franchisees can tap into the massive talent pool of the franchisor and fellow franchisees to support them as they grow their business.

Market Development: Often franchises will create pre-defined marketing and advertising programs that are mandated for franchisees to follow (and pay for).  Often very effective, an owner can benefit from the marketing expertise of the franchisor, the compound benefit of the brand, and name recognition in the market.

Potential Downsides to Owning a Franchise:

Copy and Paste: If you picture yourself Bill Gates, and your idea of success is the freedom to re-create the wheel, learn from your mistakes, and pave your own entrepreneurial path, franchising might not be for you. If you enjoy creating new products and services, determining how you want to take them to market, and having a say in your logo and name, etc, a non-franchised business may be the better option.

Transfer Fee: The initial franchise fee (or in the case of a franchise re-sale, the franchise transfer fee) is an extra cost that must be budgeted.

Future Expenses: Required build-outs and renovations to update the business and/or equipment can be costly for a new owner.

Ongoing Fees and Royalties:  Is the value of the brand, system, and support generating more income than it costs? In most cases, yes, but the fees and royalties don't go away over time.

The Benefit of a Franchise Resale:

Established: There’s a great deal of value in hitting the ground running with an established presence and customer base, track record, and ability to see sales trends. It is not a given that customers will be knocking your door down on day one if you open a brand new franchise location, but an existing franchise is often less expensive to purchase and has more information from which to form your buying decision.

Transfer Fee: Usually, the franchise transfer fee is significantly lower than the original franchise fee. Depending on the seller’s reasons for selling, the seller might be letting go of the business for less than what they initially invested.

Reduced Risk: Site procurement, facility lease, build-out, permitting, zoning, utility sourcing, etc. have already been completed with a re-sale which significantly reduces risk and cost compared to a “start from scratch” plan.

Staff: The value of having management and staffing in place and a solid HR program with a track record is extremely valuable in today’s labor market.

OK, I Agree On The Franchise Resale Idea.  What Should I Be Looking At?

Cost and Reason For Selling: Does the seller want to retire, just take their "chips off the table", or are they in a situation where they have to sell (death, divorce, disease). The reason for a sale will play a part in determining the cost of the re-sale. The more established and profitable the business is, the less risky the scenario for a buyer, and the easier it is to finance, but can come with a higher price tag.

If a seller is selling because of death, divorce or disease, they are usually more motivated, in a less favorable negotiating position, and may be willing to sell for less than the business is truly worth.  Often, Franchisors are eager to help in these circumstances to hasten the transition to a new buyer, which can be an added benefit.

Failing/Declining Business: While most buyers don’t like to catch a falling knife, businesses with declining sales and profits can still be an opportunity for the right buyer.  Do you like the challenge of improving things and consider yourself a fixer?
Do you have the time for detailed due diligence?  Do you have funding for increased working capital to ride through the lows until the business turns around (often SBA financing guarantees are not available in these situations)?

Failing businesses can offer the potential for higher ROI if you are confident of your ability to turn them around.  With relatively low investment you could potentially re-sell the business in three to five years.  Often, franchisors really want to maintain their presence in the market and will work with a buyer to fix the failing businesses' issues.

Purchase Process: The process of buying a franchise re-sale is similar to that of an independently owned business but it takes longer because there are additional requirements. 

1. The buyer will have to negotiate who will pay the transfer fee (usually the buyer pays, or it is split with the seller).

2.  The buyer will have to read through the franchise disclosure documents and potentially pay to have an attorney review them.

3.  The buyer will need to get approval from the franchisor, attend a Discovery Day at the franchisor's home office, and will need to, in most cases, personally attend mandatory training, which could take a few weeks of a buyer's time.

Bottom Line?:

When buying a business for the first time, a franchise concept can take the guess-work out of all that goes in to starting a business.  Buying a re-sale is an added benefit because you are not only getting the value of the franchise concept, you will have more information about the business to base your decision on and potentially less up-front cost.  

Considering buying a franchise?  Give us a call.  We are experts in the area and can help you find the right one for you!