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Should I expect to pay more for a franchise resale?
The answer to the question is that it depends, but when you are buying a successful franchise business the answer is that yes, you will pay more. When you buy a franchise you will be required to establish your business without any existing clients or local reputation and goodwill. You will have to pay an initial fee, which is aimed at reimbursing the franchisor its costs in complying with its initial obligations to train you, provide a marketing launch, equipment, stationery, stock and so on. When you buy an existing franchise business what you will acquire will be set out in the purchase agreement, but usually you will be buying the assets of the franchise business and all of the existing clients and local reputation and goodwill. In a successful franchisee’s business these elements could be very valuable and you will be able to gauge from the accounts of the franchisee’s business the extent to which its turnover has been growing and whether it is profitable. As a rough rule of thumb, most franchise businesses are sold for two to three times the net profit generated by that business, excluding the owner’s salary, drawings or dividends. Clearly, in a business that is unprofitable there will be no goodwill element and, essentially, you will be paying for the value of the assets that you buy.
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