Michael Bohan, director at Franchise Resales, explains the pros and cons of buying a franchise resale
If you’re looking to take on a franchise, there are two options to consider. The first is buying into a new franchise opportunity and building it from scratch. The second is to buy a franchise that’s already up and running and being sold by an existing franchisee.
Both have their merits and which one you choose will depend on your own circumstances.
One of the big benefits of a franchise resale is that the business is ready to go. It should have a supply of ready customers and competent employees. Therefore, you should be able to start bringing in money from day one.
Plus there’s less set-up work to do, compared to if you were starting from new - you don’t need to scout out locations, work out the demographics and take a gamble that you’ve chosen the right time and place.
Because a resale already has that history, you can look at the books and make a more informed decision about whether it’s a good business to take on or not.
You also get a better idea of what you can do to improve future performance. You’re in a better position to negotiate a purchasing price because you have greater flexibility and bargaining power than if you were starting a new franchise.
While it might provide a set of better options and a clearer path ahead, there are other factors with a resale you need to consider. First and foremost is why the franchisee is selling the business. If they’ve been operating for a good few years, made their money and decided to move on, all well and good.
If, however, the franchise is being resold after just a few months it could signify more serious issues. It could be that the franchisee was simply ill suited to running their own business. It could also indicate, however, that they haven’t been getting the support they expected or that there’s some other problem with the franchise agreement or set up.
What this means is that you still need to do all your due diligence and ensure you get the foundations of support you require.
There could be other issues you need to understand as well. For instance, while the franchise might have been an initial success, a change in local demographics could have altered things. There may well be competitors coming into the local area and doing business better than the franchise you’re looking at.
Change of terms
Don’t assume buying an existing franchise means you’re going to get the same terms from the franchisor as the selling franchisee. These may well have to be renegotiated, which could mean you end up with a different set of fees and terms than you initially expected.
You still need to look at the basics, such as the training you’ll be given and how the franchisor engages with you once you take over. It’s not just a question of buying off the existing franchisee.
Most agreements nowadays mean the franchisor also has the right to refuse your purchase if it doesn’t feel you’re the right person to take over.
Despite these issues, a franchise resale is still a good option if you want to find a business that’s already up and running and has the track record you’re looking for.
The benefits generally outweigh the negatives, particularly if you choose the right franchise and can build a strong relationship with the franchisor.