Franchise Resale: Should You Buy an Existing Franchise Unit?

offering a handshake

Considering franchise ownership? If you’re truly looking to hit the ground running, you might want to consider looking at a franchise resale. Here’s are some things to consider when evaluating an existing franchise operation.

Questions to Ask

First, evaluate the franchisor.

  • Examine the FDD.
  • Talk to the corporate staff.
  • Conduct due diligence by speaking with existing franchisees.

Then speak with the owner of the unit you’re considering purchasing.

  • Why are they selling?
  • How has the unit performed?
  • How likely is it that key employees will stay with the business when you become the owner?

Proceed to questions about the physical location, including:

  • What is the status of the current lease?
  • Will any of the equipment need replacing in the near future?
  • Are there changing demographics in the neighborhood that might adversely impact the profitability of the business?

Begin at the Beginning

Begin your evaluation of a franchise resale by finding out all you can about the franchisor. Examine the FDD and speak with existing franchisees in the system. Learn about the training and support the franchisor provides. If you don’t “click” with the corporate staff or if the culture described by the current franchisees is not what you’re looking for, you may want to pass on the opportunity.

Uncover the Real Reasons for the Franchise Resale 

There are many reasons why a successful businessperson may look to sell a thriving business. They may be ill, nearing retirement, or simply looking to do something else. But you will need to dig deep to find out if the seller’s stated circumstances match the real reason they want out of the business. The last thing you want with a franchise resale is to be stuck with a business that is on a downward slide. You’ll want to know if it’s been mismanaged or no longer fits the needs of the neighborhood. The disadvantages of buying a business with a bad reputation will always outweigh any perceived advantages.

Examine Performance

It’s critical to carefully assess how the business is performing, as this will affect the amount you’re willing to spend for its purchase. The seller should provide you with balance sheets, income statements, tax returns, and other financial statements. Review these figures with the franchisor to compare them with those of other franchisees who have been in business a similar amount of time. You may want to consult an accountant experienced with this type of business in order to get the most accurate picture of the performance history.

Find Out About Employees

One of the advantages of buying an existing business is that you may inherit skilled, well-trained employees. Find out about the current employees and delve into their relationship with the current owner. Look into any contracts, salary disputes, or lawsuits that may be in progress.

Review Real Estate and Inventory Concerns

If applicable, find out the term of the lease and whether the landlord will transfer it to you. If you are purchasing the seller’s equipment and/or inventory, be sure you have a list of each item, its condition, the purchase price, and how it was valued for the sale. Take all of this into account when determining the price you are willing to pay for the business.

Look Before You Leap

Many variables will impact the ability of the business to be profitable down the road. What if the street where the business is located is due for a lengthy construction project that will prevent customers from reaching your door? What if you’re investing in a trendy martini bar but the neighborhood is transitioning to one dominated by families with young children? Logistics and demographics can spell the success or failure of a business. Be thorough in your investigation of the business and its location.

A franchise resale may offer you a shortcut, but whether it turns out to be a road to disaster will depends on how carefully you research your potential purchase. Consult experts to help you – a small business banker, a business accountant, and a franchise attorney – if you need help understanding any piece of information that turns up. Don’t be tempted to accept the seller’s 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 new, proud owner.