Is the purchase of an established franchise business a faster route to profit in a slow economy? It depends on a number of factors, say our franchising experts
Purchasing an existing franchise – otherwise known as a resale – means buying a business that already comes with a history, reputation, customer base, and brand presence. Although often commanding a higher purchase fee, a resale often enables growth to come more quickly than a start-up franchise, saving time and cost. And an existing business that shows past resilience to economic dips may be just the opportunity you’re looking for if you’re nervous about embarking on business ownership during these times of uncertainty.
“The franchise resale market is strong in certain sectors; and those franchises which continued services throughout the pandemic, or have bounced back quickly, are highly desirable to buyers,” says Michael Bohan, business sales expert and director at Franchise Resales. “The current economic climate, along with the banks’ interest rates on business lending, is going to affect business purchases moving forward, but the main benefits are that you have a customer base, brand awareness, and income from day one. If you’re starting out in a business that has bounced back after COVID then you’re already starting the business on a strong footing.”
Playing the long game
“The current franchisee will have either started or grown their own franchised business and, could be exiting for various reasons – purely for profit, a lifestyle change, or just because it’s time to move on,” explains Richard Pakey VFP, franchise expert and MD at Lime Licensing Group. “Like with any business there are zero guarantees, but you’ll have the benefit of seeing some history of how the franchise has been performing. Take your time, and ask plenty of questions – there is often assistance available from specific resale consultants, who can act as a third party to ensure you fully understand what you are getting into.”
For those with enough capital to invest, the impending economic recession could create huge opportunities in franchise resales. “There will always be some industries that are hit by a financial crisis and need to rethink their model, and there will be others who see their revenue soar. Those hit harder are likely to see more franchisees looking to sell,” says entrepreneur and investor Jo Middleton, owner of the Franchise Business School, who has built and sold several successful businesses by taking calculated, educated, and mitigated risks along the way.
“This strong opportunity for buyers to purchase while the chips are down in these industries means that they’re able to rebuild when the economy does eventually pick back up. This strategy does of course come with risks and a time investment is needed as well as a financial one. However, providing you are able to dedicate the time and have the capital available, then having the support of a franchisor and a network of franchisees all sharing best practices will provide you with a fabulous springboard to expedite the re-growth of your new venture,” recommends Jo. “You’ll then have the option to keep the business for cash flow or sell it to get a return on your initial investment further down the line.”
A franchisor’s perspective
One of the main disadvantages of buying a resale over starting up a new franchise is that the opportunities are limited. As a relatively young business, EweMove hasn’t seen a huge volume of resales as franchisees have tended to re-sign their franchise agreement after the initial five-year term. Its latest WorkBuzz franchise feedback survey confirmed that 80 per cent of existing franchisees intend to re-sign at their next renewal date.
“This is great to see, that franchisees want to continue their journey with our brand and successful business model,” says EweMove’s managing director Nick Neill. “However, when franchisees do wish to exit for retirement, emigration or ill-health – which tend to be the reasons we have experienced over the years, albeit in low numbers – then we follow a pathway to sell.”
The company first looks to see whether the business can be sold ‘as-is’ to a buyer who will just take over the existing EweMove franchise. If not, the company will consider selling it and moving it across to one of its eight sister brands, which include Hunters, Whitegates, Martin & Co and CJ Hole.
“If neither of the above is an option, we will help the franchisee sell their business to an independent, as this ensures customers remain cared for and the business value created can be crystallised as a final reward for the effort the franchisee has invested in growing it,” continues Nick, showing that the business of resales is less straightforward than simply passing on to a franchisee-in-waiting.
“Being able to walk away with the full asset value after growing a business is really key to our franchise proposition and we want franchisees to have a clear exit pathway and realise the gains of their work and effort over the years. Call it their retirement ‘lump sum’, he adds.
Nick goes on to explain that most EweMove buyers want to personally deliver on scaling an already-performing business. “Our main buyer is a typical owner-operator, rather than a remote investment buyer, as the EweMove model is best delivered by those who own and run the business,” he explains. “The model will support growth through teams, but in the main, we like the franchise owner to be present on the ground and active in their business to a greater extent.”
Among the very first EweMove franchisees were a couple named Bill and Geraldine Miller, who sold their EweMove business to retire. Andrew Davy bought it after a very careful six-month transition to ensure business continuity, courtesy of Bill. This set Andrew up nicely on the road to success, and he has built on what was a solid lettings business to now include sales too. “This scenario was great, as we can see value being added and earnings increasing for Andrew,” explains Nick.
Like many other successful franchises, EweMove is also seeing existing franchisees expand their territories, either by taking over or partnering with their neighbours or simply buying another available territory. “We’re happy to support sustainable growth for any existing franchisee,” adds Nick. “Today we have around 200 territories owned by 140 franchisees, so already there are quite a lot of multi-territory owners.”
Where are the biggest opportunities?
At this current time, the franchises that provide services that people need rather than want are going to be more desirable,” says Michael Bohan. “Who knows what Rishi Sunak has in store for us over the next six months? All I think we can hope for is some stability in the UK economy. Energy prices will be putting off investors buying a premise-based building as this cost, of course, will be impacting the profit lines, which in turn impacts the sale prices.”
In times of economic recession, the decision whether to invest in a startup or a resale will to an extent depend upon the industry. “The care sector is typically recession-resilient, as care is an essential service and we tend to see the recruitment challenge easing, as more people enter the jobs market or look to increase their working hours,” says Kate Dilworth, head of network development at Right at Home. “So it’s important to research and understand how a recession might impact the sector.”
However, while buying a going concern can be a great way to bypass some of the common challenges facing start-ups, Kate is quick to point out that it can bring about different ones – for example, in a managerial franchise, you’ll need to maintain stability within the team as they navigate the changes that inevitably accompany new ownership.
“Establishing a start-up in a tough economic climate requires huge dedication, but in exchange, you get the satisfaction of having built something from scratch, and you can develop a culture based upon your own values,” she explains. “When considering a resale, you need to really get under the skin of the business, identifying any issues or challenges you might be inheriting, while also assessing how the franchisor will support you through the steep learning curve that lies ahead as you take the helm.”
Where are the bargains?
But is now a good time to snap up a resale bargain? Are the economic headwinds pointing in the direction of buyers or sellers? Short answer: it depends on your current situation.
“When everyone is selling it drives prices down, and when everyone is buying it drives prices up,” says Jo Middleton. “If there’s suddenly an influx of franchise territory resale businesses hitting the market in a certain industry, the buyer will have increased purchasing power. Some franchisees will naturally want out. They’ll either be scare-mongered by the media, feel pressured by the fears of their loved ones around them, or want to return to the stability of employment. It’s therefore fair to presume that there will be an increase in franchise territory resale businesses hitting the open market.
The ability to borrow at an affordable rate of interest is no doubt one of the biggest hurdles facing franchisees in the coming months. “The great thing about a resale is that banks can view the performance history of the business, making them much more likely to lend on a proven location/territory,” says Michael Bohan. “Banks will also lend based on the business performance with either a 30 per cent deposit amount contribution and 70 per cent lend or on debt affordability levels. However, if the business has not been showing its true profitability, then lending could become harder to secure against the business.”
Clearly, it’s a situation that favours those with substantial savings or capital, not to mention the bold. “It’s expected that we will see a drop in commercial lending over the coming months,” Jo continues. “There’ll therefore be a strong opportunity for cash buyers to swoop in and buy trading, established franchises with a stronger negotiating power and a lower level of competition.”
“At this moment in time, I would call it a buyers’ market,” confirms Michael. “People’s retirement plans have either been moved or put on hold due to Covid, and there are always sales due to personal circumstances changing. Depending on these, you may just pick up a little goldmine for a bargain price. However, do your due diligence first!”
Nick Neill, on the other hand, is more reticent that the market will throw up many resale bargains in the coming months. “I think the demand for resales will expand, as potential buyers move over from less robust industries, but will the availability of franchises keep up? It’s a double-edged sword, as existing franchisees with profitable and active businesses will perhaps think twice about selling in the current environment,” he says. “Why would they, when what they have works well and is secure in revenue flow and operations?”
Over in the arts sector, CEO of Stagecoach Performing Arts, Andy Knights, is optimistic that the Stagecoach resales market will remain buoyant, and he’s positive that franchise resales will continue to hold their value, at least in his sector. “I do anticipate our resales market will increase, as I think that in times of uncertainty and economic challenge more people look for a trading business with existing income if that’s an option open to them,” he points out. “Buying a resale will always depend on the price agreed between the seller and the buyer, and while it’s true that in times of uncertainty some great deals can be struck, if a business can demonstrate a strong sales history and growth in a growth market (parents will often go without something else rather than cut their spending and investment in their children), then this should also give a buyer the confidence to pay a fair price.”
All the usual due diligence applies when you consider a resale over a franchise start-up, but red flags can even work in your favour if you’re willing to take an educated gamble. “All resales will require the same due diligence as if you were buying any business, says Richard Pakey. “You will want sight of recent VAT returns and full sets of accounts, ideally three years, and see steady and improving revenues. A lack of one or more of these should definitely sound alarm bells. Having said this, it might be your opportunity to renegotiate the fees!”
How do you know if you’re really getting a good deal? Shelley Nadler, legal director at Bird & Bird LLP, has a legal perspective:
- A resale will have an existing history of turnover, overheads, profitability and other financial information – you will be provided with this by the seller. This is crucial in a resale – if the accounts are not reliable or incomplete you need to consider if the purchase price is justified.
- You will be paying a premium for buying an existing franchise, especially if it has been trading for a while and has a good reputation – you need to consider if you are paying too much for the resale if you will be able to afford to service any loans and make an adequate income from the business.
- Detailed due diligence is needed to understand why the business is being sold – it could be that the seller has been operating for a while and is now looking to move on and cash in on the value of the business they have built up. You will need to check that the reason for the sale is not linked to the failure of the franchisor to provide adequate support, or a new competitor has set up locally.
- Does the resale business have a good reputation with its customers and clients? Check out online reviews.
- Check the franchise agreement. The purchaser will be expected to enter into the current form of agreement, and this may not be on the same terms as the franchise agreement entered into by the seller. Also check if you will be required to pay for any training, or if there are other costs payable, such as refurbishments or new equipment.
“A strong resales market is absolutely vital for the sector”
Andy Knights, CEO of Stagecoach Performing Arts, explains why Stagecoach has a healthy resales list and why a buoyant market is the litmus test of a successful franchise system.
“With a large national network, coupled with the lifecycle of a franchisee averaging around eight years, there are always some great businesses coming to market. I think it’s important for both existing and new potential franchisees to see a strong resale market – after all, it’s the ultimate demonstration of the ability to build and realise the value of your efforts. In addition, we also have a number of greenfield territories for sale too, as we move towards our goal of complete national coverage.
“Buying a resale means buying a business that already has a customer base and that all-important brand presence in the territory. While the size of the business and how long it’s been trading varies with each resale opportunity, the fact that any new franchisee immediately gains a head start and sales income from day one is the most attractive factor.
“The two main buyers of Stagecoach resales are those with money to invest who are happy to pay the price for an established income and the jumpstart a trading business brings, and those who really want a Stagecoach business but who live in a territory where a greenfield opportunity isn’t available. Many of our resales are bought by existing team members who have the benefit of first-hand experience and can see how they can take the business to another level. The value placed upon extracurricular activities has only increased since the pandemic, and we have seen our student numbers continue to grow, making the business an attractive proposition.
“We have a healthy balance of existing franchisees expanding into new and existing territories as well as those people who already know Stagecoach and who may have been students, teaching assistants, teachers, and managers before investing in the brand. Currently, more than 20 per cent of our network operates more than one territory, which demonstrates the strength of the proposition, and we expect this number to continue to grow as more opportunities for growth become available.”
Charlotte Smith is an editor and writer for What Franchise.