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10 Things to Know When Buying an Existing Franchise Business

By Ian Klaes

When opening a franchise, you can either open a new location or purchase an existing location. Opening a new franchise can allow you to build something that's all your own. And it may be a cheaper option, too, since you only pay the initial franchise fee. But buying an existing franchise could be a more lucrative business venture and eliminate some of the headaches of a startup.

If you determine that purchasing a pre-established location is the best venture, here are some considerations to keep in mind.

1. Understand the FDD

Potential franchisees will naturally look over the franchise disclosure document (FDD), which is a legal contract between franchisee and franchisor.

Here are some of the key elements of the FDD:

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

Other pertinent information can vary depending on state requirements. It can be a good business idea to have a franchise lawyer review the FDD with you. It's important that you understand what will be required of you when joining the franchise system.

2. Review Transfer Requirements

Look at the requirements of transferring the franchise to a new owner. Ensure that there are no restrictions in place to prevent the transfer of the franchise to you. In some cases, franchisors have the Right of First Refusal, allowing them to buy the franchise back before it is offered to an outside buyer.

If there aren't any requirements preventing you from making the purchase, then the transfer should go smoothly!

3. Determine Business Value

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

While some franchisors may conduct their own appraisal, you should engage with an outside professional who can do an objective appraisal. The American Society of Appraisers is one tool that can help connect you to a professional business valuation. 

RELATED CONTENT: Why Are Some Franchises More Expensive than Others

4. Discuss Why the Current Franchisee Is Selling

There are many personal reasons why a franchisee may be selling their business. For example, divorce, unexpected financial hardship, or retirement. However, their decision to sell could be based on something more alarming. Like a downswing in the industry, the franchise is failing, or poor quality of products or services.

If the franchisee is selling due to conflict with the franchisor, you may want to investigate further. It can be a good idea to talk with other franchisees as well and learn more about the established brand.

5. Review Financial History

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 current franchise owner should be able to provide financial records of the business 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 can understand the financial health of the small business. And you can determine what — if any — wiggle room you have for negotiations to cut down franchise costs.

6. Discover How the Business Is Perceived

Try to learn more about the local and national reputation of the franchise business. For example, maybe the franchisee selling their location has been widely recognized as disengaged by the franchise system. Or maybe the local community really loves the business because of the kind approach of the staff.

Imagine you were going to buy a restaurant that seemed clean and new. Later, you discover the locals think it serves low-quality food with poor customer service. You wouldn't want to invest in a location that has a bad local reputation. By learning about these perceptions, you can avoid investing in a business that requires a lot of damage control.

Do your research by talking with other franchisees to discuss how they feel about the franchisee and franchisor. Read 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. Evaluate Franchisor Support

Before deciding to purchase the franchise, do some thorough research into how the franchisor will support you as a franchisee. Review the franchise agreement, and ask questions about existing processes.

Check to make sure they are prepared with such things as:

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

Support will be critical to your success. After all, it's one of the biggest perks of joining a franchise system.

RELATED CONTENT: Benefits of a Franchisee Support Network

8. Pay the Transfer Fee

When purchasing a franchise resale, most franchisors require a transfer fee. This fee can be paid by either the seller or the buyer, depending on the agreement made. Typically, the new franchisee pays the franchisee who is selling the business.

The fee covers the cost of hosting a Discovery Day to get to know you and evaluate you as a new potential owner. And it must be paid before the official franchise transfer takes place.

As a new owner, make sure you consider the cost of the transfer fee along with the cost of purchasing the actual business in your initial investment.

9. Determine Which Staff Will Stay

To ensure a smooth transition, you must get to know the staff and determine who will stay when you take over. Take some time to get to know the staff members and what they do. Some team members will be invaluable to the franchise, and in other cases, it may be best to start fresh.

Remember that this is a stressful time for the staff members as well. They are worried about job security and may even have some hard feelings toward you or the selling franchisee. Take time to understand where each person is at before making any final decisions.

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. Employ the services of a franchise attorney to review all of the legal documents and agreements before signing them.

Franchise ownership can be a powerfully rewarding experience. With Caring Senior Service, 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 franchising opportunities.

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Tags: Franchise Ownership