Advice on buying an existing franchise

While purchasing an established franchise has significant benefits, there are many aspects to consider before making an investment, says Jenny Batchelor, partner at Batchelor Myddelton solicitors

If you are planning to purchase a franchise, should you invest in one in a new territory or purchase an established business from an existing franchisee?

The benefits of buying an existing franchise from an outgoing franchisee include:

* You are likely to have a ready-made customer base, and from this you can project future income.

* You may be able to take on existing premises.

* You can buy equipment (if there is any) from the franchisee.

* You will be able to take on valued employees who already have a rapport with customers/clients.

* The vendor may agree to show you the ropes both before you buy and for an agreed period after the purchase. They may also give you valuable practical information about how the franchisor tends to run things on a day-to-day basis.

* They can introduce you to their favoured clients.

In short, you should get a valuable head start in running your franchise business. However, because of these benefits you will inevitably pay more for a resale than you would for a new franchise. In addition, the resale process is a lot more involved, time consuming and the legal fees are greater than if you were to buy a new franchise.

What’s involved in the resale process?
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You may have to reach agreement with several different parties. The franchisor will need to agree you are a suitable person to become a franchisee and you must agree to the terms of the franchise agreement. You will be required to pay a franchise fee and be trained by the franchisor before you can take over the business.

The purchase price for the existing franchised business will have to be agreed with the outgoing franchisee.

In some franchise networks, the franchisor plays a central role in these negotiations, while in others franchisees are left to their own devices. However, there will need to be a legal agreement between you and the outgoing franchisee that sets out the terms of the purchase.

If there are premises involved in the franchise, such as a shop or an office, you may need to agree with a third party landlord that you are a suitable person to take on the lease of the premises.

If you need bank funding to finance payment of the purchase price and franchise fee, you will also have to liaise with a bank. Depending on how much you want to borrow, a bank is likely to want security for any loan offered, which will also need to be arranged.

You should be aware that the process can take some time, and it is unlikely in practice to take much less than three months. You need to factor this into your planning.

The franchise agreement
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The terms of the franchise agreement are likely to be the same whether you are buying an existing franchise or a new one. Accordingly, you should ensure you understand the legal implications of entering into a franchise. A specialist franchise solicitor will be able to advise you fully on the terms and what experience it has of that particular franchise. If it is considered that amendments should be made to the franchise agreement, it is common for a franchisor to agree a side letter to the agreement.

The agreement for sale of the business
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This document needs to be negotiated between you and the outgoing franchisee. You will be paying an agreed sum to the franchisee for the goodwill of the business and the equipment. The franchisor is likely to take a cut of this sum, depending on how involved it was in the sale process. Some franchisors require that the purchase price be paid to them directly - they then deduct their percentage and pass the balance onto the outgoing franchisee.

You should do your homework before you agree to buy and obtain details of the following in particular:

* The accounts of the business, to make sure the figures stack up. You may want to get an accountant to look at them if you are unfamiliar with accounts.

* The equipment list. You need to make sure that key items of equipment are in good working order.

* The customer list (if relevant to the type of business). It is important that customers will not leave as a result of the outgoing franchisee selling up.

* The employee list. With a small ownermanaged franchise, the franchisee may be the only person working in the business and when they sell they will probably want to leave. However, if there are additional employees you are likely, due to employment law, to have little option but to take them on, on the terms and conditions they have agreed with the previous franchisee. It is important you get full details of all employees, including copies of their employment contracts.

Your solicitor will be able to advise on the terms of the agreement and any issues that are particularly relevant to the type of business you wish to purchase.

Share sale
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In some cases where the outgoing franchisee operates through a limited company, it may want you to buy the shares of the company rather than the assets of the business. Many of the considerations are broadly the same as in the case of sale of goodwill and equipment. However, in the case of a share sale there are extra factors to consider, such as outstanding tax liabilities. You should take additional advice from your solicitor if it is proposed that you buy shares.

The lease
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With a franchise that is shop based or where you have to operate from an office rather than home, you will need to agree terms with the owner of the property. If the outgoing franchisee holds an existing lease and you are buying the business, this lease will have to be assigned to you. The landlord will need to ensure you are able to pay the rent and will want references from your bank to establish your financial position. Again, this procedure can take time and the timescale is likely to be out of your hands.

In the case of a sale of shares, the tenant will still be the company, so no assignment will be required. However, the landlord is likely to want you to provide a personal guarantee.

If you take all relevant advice and protect yourself from potential pitfalls, you should reap the significant benefits of purchasing an existing franchise.