Is buying a franchise resale a smart move?

Buying a franchise resale can be an attractive way to enter a franchise opportunity without starting from scratch. However, it comes with its own set of opportunities and risks that need careful consideration…

What is a franchise resale?

“A franchise resale is when you buy an existing franchise business as a going concern from a franchisee with the rights to operate the franchise. It could be a sale of a company or a sale of the assets of the franchisee’s business”, explains Shelley Nadler, legal director at Bird & Bird.

“The process can be complicated, as many parties are potentially involved,” adds Brian Duckett, former chairman of The Franchising Centre. “The franchisor must approve the deal and the incoming franchisee, just as they would for a greenfield outlet.”

Why do franchise resales happen?

Franchise resales happen for a variety of reasons. Alan Wilkinson, head of franchise development at The Franchising Centre, explains: “Often a franchisee will have had an exit strategy when they first purchased the franchise. They will have spent years working towards this exit, building the business (and therefore the sale value) with this goal in mind.”

Other resales occur due to unplanned events or if a franchisee is struggling.

How does a franchise resale differ from starting a new franchise?

While both resales and new franchises require entering into a franchise agreement, there are key differences.

Pratt notes: “On a resale you will be taking on an existing franchise that has been operated by the seller of the business. In addition, unless the franchisor agrees to do it, the franchisor does not have to provide you with any initial training or any of the other initial obligations that franchisors provide to ‘new’ franchisees.”

However, in practice, franchisors usually want to train the new buyer, creating a direct contractual link. The biggest legal difference is the need for a business purchase agreement. This protects the buyer from unknown liabilities.

Pratt emphasises: “It is important to obtain legal advice on the terms of that agreement.”

What are the benefits of buying a franchise resale?

Buying a resale can offer several advantages over starting a brand-new franchise. John Pratt, senior partner at Hamilton Pratt, notes that because you take on all the franchisee’s assets and employees, “from day one you have an existing business.” This means you can potentially start generating revenue from day one.

Duckett adds: “Providing you do your research properly, you will know exactly what you are buying when you take on an existing franchised outlet. You have the trading history of the outlet you will be running on which to base your business plan.”

Wilkinson summarises the advantage clearly: “A resale can offer a good opportunity to buy into an established business, so long as you are confident that you have the skills required to take the business to the next level.”

What are the potential drawbacks or risks?

While resales offer clear advantages, there are also risks to consider. Wilkinson warns that a struggling business may be available at a lower price, but the reasons behind the struggles need careful investigation.

“Beware that there may be factors that are difficult to overcome. This might include lack of demand in the area for the product or service, or a very strong local competitor.”

Duckett adds: “If more than one franchisee has previously done badly with the outlet, you can start to ask questions as to whether the franchisor’s recruitment process is any good.”

It’s important to assess not just the current performance but also the potential challenges you might inherit.

Should I expect to pay more for a franchise resale?

In general, purchasing a successful resale is more expensive than starting a new franchise. This is because you are acquiring existing goodwill, customers and operational history.

As a rule of thumb, Pratt says, “most franchise businesses are sold for two to three times the net profit generated by that business. This excludes the owner’s salary, drawings or dividends.

“Clearly, in a business that is unprofitable there will be no goodwill element. Essentially, you will be paying for the value of the assets that you buy.”

What due diligence should I undertake when buying a franchise resale?

Due diligence is crucial to avoid costly mistakes. Shelley Nadler advises reviewing at least the previous three years of accounts. “Previous performance statistics can help create a picture of the health of the business. You can also use them to forecast future performance.”

Other checks include understanding why the franchise is being sold, whether you will sign a new franchise agreement or take over the existing one, and verifying the terms of that agreement.

Nadler also recommends speaking with other franchisees: “Why did the previous franchisees leave? Have any of the franchisees had difficulties with the franchisor? How have those issues been resolved?”

Conclusion

A franchise resale offers a chance to step into an established business with operational history, a customer base and tangible assets.

It can accelerate early success compared with starting a new franchise, but it also requires careful due diligence, professional advice and an understanding of both the legal and operational complexities.

By asking the right questions and reviewing trading history, you can make an informed choice about whether a resale is the right path for you.