Evaluating & Buying a Franchise

What are the Benefits of Buying an Existing Franchise?

What Are the Costs of Franchising?

What About Franchise "Re-Sales"?

The process of buying a franchise that is already up and running - also known as franchise resale - is often a very exciting and economical way for an entrepreneur to get into a live business operation. The advantages of taking the helm at a franchise that has already shown itself to be successful are numerous, especially when one considers the considerable risk involved in opening up a brand new store. Yet, in many ways, a franchise resale (especially with failing businesses) can also end up being a big gamble for the entrepreneur. To avoid having the resale end up ruining the investor, there are certain specific questions that need to be asked. In order to ask these questions, and make all the right decisions, the buyer must be aware of everything involved in the resale process.

Making the assessment

One of the most important first steps in deciding whether or not a franchise resale is going to succeed is determining what stage the business is currently in, and where it will go should the interested investor actually make the purchase. Sometimes, businesses that are barely hanging on can present a golden opportunity for the prospective resale franchisee to buy it at a low price, turn things around and end up making a profit. This involves superior management skills and a clear plan of action about how, exactly, to fix the problems that have brought the current business into near ruin. By identifying bad marketing strategies, unnecessary expenses, and other significant - and reversible - factors that have been bringing the business down, one can make a decision based on the calculated possibility of improvement.

Another scenario that often faces potential resale franchisees is the business that currently glows with success. The franchise is turning a profit, the employees are happy and the management works a schedule that permits plenty of time for the family - so why are they willing to sell? It is important for the potential investor to verify that the current owners truly value the business but simply wish to retire and move on to a more relaxing lifestyle. If this is the case, it's probably a good business to buy. But it is crucial to be aware that a thriving business can easily take a turn for the worse, and there are many factors spelling out failure in the near future that the current franchise operators may not be so willing to disclose.

Surprisingly, a great way to begin digging for this type of information is by going straight to the person selling the franchise. Even if the person is sugar coating all of the crucial data being sought, this is a sure-fire way to have them be accountable for the figures they are giving - and something that a lawyer can include in the contract that will be needed should the resale go through. It's important to ask them about how well the franchise has been doing overall - especially within the past couple of years - as well as how crucial the location is - is the cost of rent is going up soon? - Employee turnaround should be discussed - how happy are they really? - Finally, one should ask if there is something not yet known by the buyer that might cause problems later on. Whether or not the seller is trustworthy, it is important to have a record of his or her responses.

Another place to go is the franchisor. Ask all the same questions and check their answers against those of the sellers. While the company may at first be reluctant to get involved in the details, they will most likely participate in the interview process. After all, any quality organization will have an interest in seeing all of its franchisees - even the franchise resales - succeed.

Is it worth it?

When buying a failing franchise from an existing operator the whole point is to get a great deal. With this in mind, it is necessary for a prospective resale franchisee to calculate the business price by subtracting all of the improvement costs from whatever would be paid for a new franchise. Usually, this final figure is taken down even further (significantly further) and - voila - the offer's on the table. In this situation it is important to remember that the buyer wields a lot of bargaining power.

For succeeding franchises - oftentimes a much preferred resale option - the best price to offer involves a multiple - two, three, four or even five times - the total cash flow. It's a bit pricier, but a whole lot less risky and probably well worth it in the end.