Q.

What are the advantages of investing in a franchise resale?

Author: John Pratt

answered by John Pratt

Senior Partner at Hamilton Pratt

There are two ways in which you can become involved in operating a franchised business.

The first is to enter into an agreement with the franchisor to take a territory where no other franchisee currently operates. The attraction of this approach is that the cost of taking a franchise in this situation is likely to be lower than the cost of acquiring an existing profitable franchise business. However, you will need working capital because, in the early days, you will have few customers and, therefore, your turnover may be lower than your outgoings.

The second is to acquire an existing franchise business from a franchisee who wants to leave the network. Here you take on all the franchisee’s assets and employees, but you would, from day one, have an existing business.

What you would have to pay depends on whether the business you acquire is profitable. If it is, you would generally expect to pay two and a half times the annual profits earned by the franchise business before tax and before deducting any payments (whether dividends or salaries) to the franchise owner.

If the business is not operating profitably, you would generally only pay a nominal sum or a sum that reflects the value of the assets being transferred.

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