Buying a franchise resale

By Tony Fitzpatrick
Buying an existing franchise instead of a new one in a virgin territory can be a safer option for people reluctant to start a business from scratch.
The advantages are significant. The business is already trading with cashflow, a brand presence, an established customer base, and systems and procedures in place. If staff are involved in the business, they probably know what they’re doing. Based on current and past performance, it is easier to make financial projections. It means the new owner can hit the ground running, avoiding most of the problems associated with a start up business.
Against that, there is the cost to consider. Buying a franchise resale is likely to be more expensive than what it will cost to sign up for a new territory. You can expect to pay a premium for an existing business and well-established and profitable franchises can command a high price. It is not unusual for such businesses to change hands for €500,000 or more, especially if the sale includes leases, stock and equipment. Home-based franchises can be bought for much smaller sums, making them a much more attractive proposition.
Most franchisors welcome the arrival of a new franchisee as an injection of new blood, with all the drive and enthusiasm the right franchisee can bring to the network. While there are no figures for Ireland, recent British Franchise Association/NatWest research shows that about a third of new franchises signing up in the UK do so through a re-sale opportunity.
Banks are inclined to favour a franchise resale over a new franchise since they can see the hard work has already been done and they’ll have turnover figures to indicate what earnings they can expect you to achieve.
Before taking the plunge, of course, you’ll need to know why the owner is selling.Some people want out because they’ve got tired of it, or they sense the market is changing and believe business is going to be hit by increased competition. But there are other reasons why people sell. Retirement, partnership disputes, divorce, and long term illness can be the trigger, or they might need the money for something really important, such as medical needs or educating their children.
If the business is up for resale because it has been under performing you’ll need to feel confident that you have what it takes to turn it around. Consider the pros and cons of the location and research the local market. Arrange to work in the business for a week or two as a member of staff to get the feel of it. Always stay on good terms with the person from whom you are buying the business. The franchisor will offer support and advice, but local knowledge and experience can be crucial to your success.
Do your due diligence. Check performance and potential and negotiate on a valuation based on the levels of pre-tax profit the business generates. A good franchisor should be able to corroborate the information the franchisee has provided which will help you to make that important decision.
Tony Fitzpatrick, Franchise Your Business Ireland,