How to buy an existing franchise
The owner of a franchise (or a franchisee) is no different to the owner of a regular business; at some point in their life they reach the decision it is time to sell and go and do something different. It can be due to divorce, a health issue, retirement or perhaps an opportunity to cash out their initial investment in a franchise to protect it. Life happens. How to buy an existing franchise? Is it the same as buying a “normal” business?
As Yogi Berra could have said, “Buying a franchise is the same as buying a normal business, only it’s different.”
Why is buying a franchise different?
From a franchise buyers perspective there are a some differences. Most of them help the franchise buyer while most of them slow down the franchise buying process. Let’s have a look at a few of them.
1. The franchise buyer has to qualify to buy the franchise
When a business owner sells their business they generally are not too concerned about the skills and qualifications of the buyer. However, without exception the franchise buyer must be approved by the franchisor.
The reason for this is that a good franchise system will have minimum quality standards; this is how the franchisor builds their brand. The franchisor wants to make sure the buyer of the franchise has the ability to meet those standards and therefore will be rigorous in their decision about whether to approve the franchise buyer.
2. Franchise buyer will need to attend training
The quality of the franchise is often reached by the in-house training of the franchisor. This training can be the initial training to educate the franchise buyer on the minimum standards of the franchise system. Additional and on-going training are generally part of a good franchise system. If a business buyer acquires a normal business, the seller expects they have some basic knowledge about running a business and will give transitional training for a week or two but not foundational training.
3. The quality of the financial statements should be higher
One of the advantages for a franchise buyer is that the quality of franchise statements should be higher.
Most franchisors charge a monthly royalty to the franchisee to be part of their franchise system. To make sure the franchisor is paid and paid accurately, the franchisor at their expense creates a point of sale system to capture all sales and then deduct their monthly royalty. With this system in place it should be very easy to prepare a set of financial statements which the franchisee then uses to roll up into the annual tax return.
As everyone hates paying any more taxes than they need, the franchise buyer can be confident that the numbers they see from these financial statements will be the minimum performance of the franchise. This also helps the franchise buyer if they need to get a loan and also helps the seller if there is a request to provide seller finance.
4. Franchise buyer can interview other franchisees
One of the best advantages when buying a franchise is that you can interview and talk to other franchisees in that system. This means you don’t just get the opinion about the performance of the business just from the seller’s perspective, but also the current franchisees working and making a living from the franchise. Plus you can ask the current franchisees their opinion about the franchisor; which is a wonderful option.
Disadvantages of buying an existing franchise
Buying an existing franchise does come with some disadvantages.
These disadvantages include not knowing if the franchisor will accept you; even if the seller agrees to your offer. This is because the franchise agreement does not need the franchisor to accept you as the buyer but rather meet their qualification process that includes looking at your financial and business management strength plus anything else important to the franchisor.
Another disadvantage is that the buyer may have to attend training before the franchisor will approve them to take over the franchise. This will normally always be at the franchise buyer’s expense.
One final disadvantage can be timing all the pieces so the franchise is not damaged. This means the buyer making their offer to time with the seller’s needs, conduct the necessary due diligence, get finance approved such as an SBA loan, get the landlord’s approval if the business includes leased real estate, attend the training, open and handle escrow and finally know if the sale will go through. That is, there are lots of moving pieces and if one piece is slow to process or worse still, unable to arrive at a positive outcome; it may all have been a waste of time and energy.
For more immediate help with buying a franchise, send an email to Andrew Rogerson or give me a call on 916 570-2674.