Selling a Business

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Have you thought about buying a franchise re-sale?

posted by: Lauren Altschuler
Apr 30, 2019 7:41:59 AM

While perusing your favorite businesses for sale web site, you’ll probably run across several franchise re-sales.   Could a franchise re-sale be in your future?  Following are questions to ask yourself and your advisor when considering a franchise re-sale:

  • Is a franchise for me? The funny thing about franchise re-sales is that they come with a franchise.
    • There are several advantages of franchises compared to a non-franchised busisness:
      • Branding: Customers recognize the consistency and product expectations of a particular brand.  Many of the fastest growing businesses in the country are franchises because of their growing brand power.
      • Systems: This can be a really big factor for first time business owners. A recipe for success for employee recruitment / training, product ordering, bookkeeping, etc.
      • Support and Training: Again, this can be a really big plus for first time business owners.
      • Market Development: Often franchises will have pre-defined marketing and advertising programs that are mandated for the franchisees to follow (and pay for).  However, these are often very effective with franchise marketing expertise working with you for maximum effectiveness.
    • Potential franchise downsides:
      • If you picture yourself as the Marlboro man and your picture of success is your freedom to create your own entrepreneurial path, franchising might not be the right path for you. If you enjoy creating new products and customer services, and determining how you want to provide them, a non-franchised business might be better for you.
      • The initial franchise fee (or in the case of a franchise re-sale, the franchise transfer fee.) these can be a significant extra start up cost, that must be budgeted and financed.
      • Required extra build outs / renovations to update store and or equipment requirements from the franchisor.
      • Is the franchise’s marketing plan and brand successful in your business neighborhood? Purchasing a franchise is not a guarantee of success.  Is there a history of successful franchise operations in your general area?
      • On-going franchise royalties. Is the value of the brand, system, and support generating more income than it is costing?
    • Is a franchise re-sale or a new franchise start up right for me?
      • Much of this question is the same as purchasing an existing business compared to starting one from scratch:
        • There’s a great deal of value in hitting the ground running with an established presence and customer base, compared to starting up from scratch and funding the marketing development time while customers slowly start coming to your door to try you out. It’s not a given that customers will be knocking your door down on day 1 with a new franchisee start up plan.
        • Site procurement, facility lease, build out, permitting, zoning, utility sourcing, etc. are complete with a re-sale which significantly reduces risk and cost compared to a “start from scratch” plan with those unknowns waiting to trip you up.
        • Staffing and management in place. The value of management and staffing in place and a solid HR program with a track record is extremely valuable in today’s labor market.
        • Many times, if you are looking at starting a new franchise location, a re-sale of a nearby location can be less expensive with less unknowns, and the ability to be in business tomorrow. Usually, the franchise transfer fee is significantly lower than the original franchise fee. Depending on the seller’s reasons for selling, the location might be selling for a discount.
      • For a specific franchise re-sale business, determining if this is the right re-sale often comes down to the seller’s reasons and timing of the sale.
        • Usually, the reason for sale falls into one of four categories:
        • Retirement or just wanting to take chips off the table. These reasons may yield the least buyer risk and most stable profit projections. These businesses are usually easier to finance, however, with valuable businesses, come higher price tags.
        • The three D’s (Death, Divorce, Disease). These reasons usually bring the most motivated seller’s for quicker negotiations and the best chances for lower price tags for the potential return on investment, but the chances of finding just the right business under these conditions is low, and the time taken for that search can rob you of opportunity profits you could have had in purchasing a different business when it came up.
          • Often, franchisors are eager to help with these circumstances for rapid transition to the new buyer.
          • The three D’s can be a great opportunity for a buyer at the right place and time.
        • Seller / Franchisor incompatibility. Often both seller and franchisor are eager to dance with someone else for rapid negotiations and transitions.
        • Failing / Declining Business. While most buyers don’t like to catch a falling knife, businesses with historically 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 it can be fixed? (often SBA financing guarantees are not available based on historical financials)
          • Do you really like to buy low and sell high?.. Like it well enough for the upcoming hard work, and risk? Failing businesses can offer the potential for very high ROI if you are confident of your ability to turn them around through continued operations with a relatively low investment or through a re-re-sale with potentially high gains.
          • Often, franchisors really want to keep their presence and will work with a buyer to fix the failing businesses problems.

Franchise Re-sale Buying Process

The buying processes for franchise re-sales are similar to most non-franchise business purchases with the addition of the franchise details of discovery, regulated Franchise Disclosure Documentation and mandated review times, approval process, financing, franchise agreements, training, and actual franchise transfer process.  These can add a little extra time between offer to closing, but usually don’t preclude these purchases with advanced planning. 

 If you would like a more in depth look at franchises, have questions about the franchise re-sale buying process, or have found a franchise re-sale that strikes your fancy, give us a call.  We would love to help you through the process.

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