Suzie McCafferty, managing director of Platinum Wave, explains why franchise resales are becoming more popular
Once upon a time, franchise resales were rather poorly regarded. Thankfully, times have changed and there are now many reasons to consider a franchise resale rather than a greenfield business.
Buying a resale is like getting a double whammy. Firstly, you have all the key benefits that franchising brings with its security and sustainability of business, plus you have revenues from day one, rather than starting from scratch.
The main reason for the growth in popularity of resales is that the franchise landscape has changed dramatically.
Franchising is a mature industry and many franchisees are now retiring and wish to hand over the reins to someone new.
Also, for many mature franchises there are no new territories to sell as they reach saturation point, so the only way to bring new blood into the network is through existing franchisees selling their businesses.
There are numerous reasons why an existing franchise may be up for sale. The owner could be retiring or has decided not to renew after their five-year term. Selling the business could also be caused by ill health, death, relocation or a change in personal circumstances.
Then there could be reasons of nonperformance, whereby the franchisor has taken the franchise away from the franchisee. In such circumstances, the franchisor should be honest about the reasons, but that doesn’t mean you shouldn’t do your own due diligence.
The most obvious advantage of a resale is that you’re buying a ready made business with an existing client base and revenue streams. So it should be a no brainer. Or is it?
Buying a resale is not without its challenges. You need to be certain you can retain the customer base once the incumbent franchisee has gone. Much of business is built on relationships and if the clients liked dealing with the previous franchisee but not you, then you may have a problem.
Likewise, if it’s a business employing staff, you will need to get them on board and used to your way of working - a new broom sweeping clean may not go down well with some people.
The existing staff may be used to certain working practices and if you try to change them too fast you may have an exodus on your hands.
Under the TUPE regulations, you need to take over the previous franchisee’s employment terms, conditions and obligations. You cannot make redundancies just because you feel the business is overstaffed or someone doesn’t fit with your new regime.
The business may require premises to operate from. What are your obligations in terms of taking over a lease or rent agreement? Equipment or vehicles needed to operate the business may need upgrading, repairing or replacing, so this should be taken into account.
Making your choice
How do you go about choosing a resale? There are many websites and publications advertising franchise resales, as well as a number of brokers who specialise in them.
For every resale there should be a prospectus that details what the business is, past and current trading performance, the marketplace, financial information, customers, staff, premises and equipment. As this information is highly confidential, you will be required to sign a non-disclosure agreement before seeing this document.
How is the resale valued? It should be valued by an independent expert who has no vested interest in inflating the cost of the franchise. If you’re buying a franchise that has been underperforming, you should expect to pay a lesser amount. However, you need to be confident you have the skills and drive required to turn around a poorly performing franchise.
You should review the prospectus with your solicitor or accountant - preferably British Franchise Association accredited - to ensure the numbers and business structure stack up. Nothing should be left out of the prospectus, even if there have been problems with the franchise, which should be revealed to the prospective purchaser.
When you have decided to buy the franchise, a sale and purchase agreement will be drawn up that will be used in conjunction with the franchise agreement to transfer the franchise to you. Again, it’s vital to have a bfaaccredited solicitor check over these documents to ensure nothing is amiss.
Exchange of contracts
Once you’re happy with the agreements, there is an exchange of contracts - similar to a house purchase - to transfer the franchise to the new owner. The new owner must then complete the training to the franchisor’s satisfaction.
However, just because you’ve bought an existing business doesn’t mean you can rest on your laurels. You will need to work hard to maintain the existing client base and the franchisor will expect you to put in the effort needed to build and grow the franchise from its current level.
To sum up, the key things to consider when buying a resale are to do your research, carry out due diligence and work with professional advisers who know the franchise sector intimately.