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Caring Senior Service Franchise Blog

10 Things to Know When Buying An Existing Franchise Business

Posted by Ian Klaes on Sep 26, 2019 3:08:00 PM

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As with any business venture, you want to research and learn as much as possible before taking the first steps towards entrepreneurship. Franchising is no different. When opening a franchise, you can either open a new franchise location or you can purchase an existing franchise location.

When opening a pre-established business, there are a different set of considerations that you need to keep in mind than if you are starting from ground zero. Here are some tips to guide you when it comes to a franchise resale.

1. Understand the FDD

When considering a franchise, potential franchisees will naturally look over the franchise disclosure document (FDD), which is a legal contract between franchisee and franchiser. You should consider the following elements of the FDD:

  1. Fees/Require Purchases
  2. Branding/Advertising Information
  3. Training
  4. Quality Control
  5. Indemnification

And other pertinent information which can vary depending on state requirements. It's important that you understand every aspect of the agreement because you will be responsible for holding up your end of that agreement as much as the previous seller was. 

2. Review Transfer Requirements

One critical thing to review when considering a franchise resale is to look at the prerequisites of transferring the franchise to a new owner. You must ensure that there are no restrictions in place to prevent the transfer of the franchise to you. In some cases, franchisees have the Right of First Refusal, allowing them the opportunity to buy the franchise back before the business is offered to an outside buyer.

If you have interest in a franchise that is for sale only to learn it is not a lawful transfer, your losses could be much more than you expected. However, most transfers go smoothly. But it's always good to be prepared.

3. Determine the Business Value

Today's consumers often check customer reviews to determine whether or not a product or service is valuable. In the case of a franchise resale, getting a business valuation is critical to determining the viability of a franchise. 

The value of a franchise can vary depending on different factors such as:

  1. Current Inventory
  2. Equipment
  3. Business goodwill
  4. Assets

The best option for getting a business valuation is to engage with an outside professional who can do an objective appraisal of the value. The American Society of Appraisers is one way to get a professional business valuation. 

4. Discuss Why the Current Franchisee Is Selling

There are many personal reasons why a franchisee may be selling their business, such as divorce, unexpected financial hardship, or they are seeking to retire. However, their decision to sell could be based on something more alarming such as a downswing in the industry, inability to work with the franchiser, or the franchise is failing.

If the reasons for the sale are due to problems within the establishment or with management, you will need to take into consideration whether or not these are issues you can resolve as the new franchisee.

5. Examine Financial Records

Naturally, you will want to buy a business that can produce results. The IRS suggests that businesses keep financial records for 7 years so the seller should be able to produce the financial records of the franchise going back at least 3 years.

Financial records should include items such as:

  1. Income Statement
  2. Balance Sheet
  3. Cash Flow Statement
  4. Profit/Loss Statement (PnL)
  5. Outstanding Debts

By examining these records, you not only get a good idea of where the franchise stands financially, but you are also able to determine what — if any — wiggle room you have for negotiations by eliminating unnecessary expenses.

6. Learn More About the Seller/Franchiser

Imagine you were considering buying a restaurant franchise that looked great on the surface only to discover the locals consider it to be a filthy place to eat or it's known to serve low-quality food with poor customer service. You wouldn't want to invest in a location that has a bad local reputation or a franchise that is ill-reputed among consumers.

It is important to research and learn more about how the franchisee is perceived in the local community as well as the reputation of the franchise as a whole. This can prevent you from investing in a business that will require you to do a lot of damage control to rebuild its reputation. 

You can do this by checking with other franchisees to discuss how they feel about the franchisor and reading over the company's mission statement and vision. You can also look over customer reviews of the specific franchise you are considering and talk with existing employees.

7. Analyze the Franchisor

Before deciding to purchase the franchise, do some thorough research into how the franchisor conducts business. Check to make sure they are prepared with such things as:

  1. Infrastructure
  2. Training
  3. Policies/Procedures
  4. Vendors
  5. Support

These things will be critical to the success of your franchise. Talk with other franchisees and ask them about how the franchisor handles these things.

8. Pay the Transfer Fee

When purchasing a franchise resale, most franchisors require that you pay a transfer fee to cover the cost of the transfer and their costs of evaluating you as the new owner. This fee is paid either by the seller or buyer and is usually either a flat rate or a percentage of the transfer cost. Regardless of who pays it, the transfer fee must be paid before the transfer can occur, so be sure to incorporate the transfer fee when negotiating the purchase cost.

9. Determine Which Staff Will Stay

To ensure a smooth transition, it is vital to understand which staff members will stay once you take over the franchise. Take some time to get to know the staff so you understand which staff members are invaluable to the franchise. Talk to the existing franchisee to get their opinions. This will also allow you to get additional input from the existing employees about how they feel about the franchise and the franchisee, as well as give you the opportunity to address any concerns the staff members might have regarding the transfer of the franchise.

If it is a small operation, you may want to discuss the existing franchisee staying on as a consultant to help you get to know the ropes when it comes to operations, vendors, suppliers, etc.

10. Employ a Franchise Attorney

There are many different types of attorneys. Just as you would not hire a real estate attorney to handle a divorce, you would not want to hire a divorce attorney to handle a franchise purchase. Be sure to employ the services of a franchise attorney to review all of the legal documents and agreements before signing them.

Owning a franchise can be a powerfully rewarding experience. With Caring Senior Service, you are not only free to be your own boss but you have the opportunity to make a real impact in the lives of those you serve. We invite you to contact us today to find out more about our fantastic franchising opportunities.

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Topics: Franchise Ownership

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