Should You Buy a Resale Franchise? by Candice Clem

Any franchise business, particularly one that has a number of existing franchise units and has been in business for a number of years, is likely to have already established units for sale. These resales can come about for any number of reasons. In some cases the franchisee has built up equity in his business and wants to sell it for a profit. In other cases, the franchisee needs to sell because he isn't successful or because or of illness or family issues. If there is a resale opportunity available with a franchise you'd like to join and in an area you would like to run a business, should you buy it?

There are certainly advantages to buying a resale business. If the franchise requires a retail location, by buying an existing unit you will avoid the unprofitable lag time between signing the contract with the franchisor and waiting for the site selection and build out process. Also, you will inherit a customer base to give you a head start. Finally, you will have records from this business so you will be better able to estimate how much money you can make.

The downside of buying an existing unit is that besides inheriting a customer base, you may also unknowingly inherit some very unpleasant surprises. If you find a franchise you want to join and there is a resale opportunity available, be sure to ask the owner of the unit following questions before you sign the contract:

1. What is the current owner's motivation for selling?
Keep in mind that you may not get direct or truthful answers,
particularly if the seller has something to hide. A business owner is not likely to tell you that he's been losing money because he can't keep employees or lacks customer service skills. You may need to question employees or customers to get an accurate assessment of the current business. The disadvantage of buying a business with a bad reputation will outweigh any perceived advantages.

2. Is the unit successful?
If you are buying an existing business, the price you pay should be based on how well the business is performing. You would expect to pay well for a business earning money and should pay a lower price for a unit that is not. Therefore, determining how the business is doing is very, very critical to your decision to buy and to the price you will offer to the seller.

3. What has the financial performance of the franchise been over the past year or two?
The seller should provide you with balance sheets, income statements, tax returns and other financial statements. You will want to check these figures with the franchisor to compare how these figures match up with other franchisees that have been in business a similar amount of time. You may also want an accountant experienced with this type of business to look over the figures as you want the most accurate picture of the performance history possible.

4. Does the current location have key employees? If so, how likely are they to stay with the business when you have assumed management?
One of the advantages of buying an existing business is that you may inherit skilled, well-trained employees. Get a good understanding of the current employees and delve into their relationship with the current owner as well as any contracts, salary-disputes, or lawsuits that may be in effect.

5. What is the status of the current lease? Will any of the equipment need replacing in the near future?
If the business has a lease, find out if the landlord will transfer the lease to you and how long the lease runs. If you are buying the current equipment and inventory, be sure to get a list of each item, its condition, the purchase price, whether the equipment was purchased or leased, and how each item was valued for the sale. Since there's no fixed price for buying an existing franchise, you will want as much information as possible to determine what price you are willing to pay.

6. Have there or will there be changes to the demographics in the neighborhood? Does the city plan to make any changes to the roads or areas around the business that could impede your customers from reaching you?
There are other things that may impact not only the value of the business as it stands today but the ability of the business to be profitable down the road. One example is that the road in front of the business may be due for some lengthy construction projects, preventing customers from reaching your door easily.

Buying an existing franchise may be a shortcut but whether it turns into a shortcut for success or the road to disaster depends on how thoroughly you research every aspect of the franchise company and of the existing business. Rely on experts to help you - like a small business banker, a business accountant and a franchise attorney - whenever information seems fuzzy or you just need more help understanding what you are looking at.

Remember that buying an existing business is a negotiation process and that you are under no obligation to accept the seller's price. Your place of power is that you can always buy a new franchise and start from scratch, often for the same or less money. So don't be tempted to accept the offer unless you have done enough research to determine if the price is fair and that the business stands a very good chance of success with you as the proud new owner.

A FranChoice consultant can help you explore a number of franchise opportunities. You are invited to sign up for our free service HERE.
About FranChoice:
FranChoice is the leading network of franchise referral consultants in the United States. Since 2000, FranChoice has been providing a free service to those interested in franchise ownership. Our consultants guide prospective franchisees through all stages of the business ownership process, from franchise investigation to the final sale, matching each individual's interests, talents and investment level with a strong franchise business.

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