While purchasing and establishing a new franchise unit may seem easier than starting from scratch with your own business model, it is still a time consuming and expensive undertaking. Franchisees must find a location, make needed renovations and secure various licenses or permits. Of course, even after the business opens its doors, it will take more time to acquire loyal customers and generate revenue. With big expenses and minimal revenue, it should come as no surprise that most new businesses operate in the red for the first year or two. If you are an aspiring entrepreneur who is looking to hit the ground running, it might be a good idea to avoid the laborious setup process and consider buying an existing franchise, often referred to as a “resale.”
As with any business venture, buying an existing franchise can be profitable and rewarding but it doesn’t come without risks. If you are contemplating the purchase of an existing unit, consider the following:
Get to Know the Franchisor
Although you will own the unit, you will have to continuously work with the franchisor. It’s important that you take time to understand the company’s approach to business, what type of resources they will provide to you and understand any requirements that might be set forth for the businesses that bear its name. Take time to speak with other franchisees to learn about their experiences as owners and carefully review the Uniform Franchise Offering Circular (UFOC).
In some cases, the franchisor may have a right of first refusal meaning that they ultimately have a say in whether you can join the franchise group as an owner. A business law attorney can help you sort through these issues and position you for success.
Identify the Real Reason the Existing Owner is Trying to Sell
There may be many reasons why a current franchisee is looking to sell his or her unit. In some cases, it may be because the owner is planning to retire or wants to relocate. In other situations, you may find that the business isn’t profitable and the owner wants to cut his losses and try his hand at something else. Understanding the reason for sale will help you to better understand whether it makes sense for you to buy the business. If it is a failing franchise unit, you have to reasonably ask yourself if you will be able to turn it around. On the other hand, a retiring owner may have amassed a loyal customer base which will help you to be immediately profitable.
Review the Current State of the Unit
During the discovery process, it’s imperative that you carefully review all of the financials for the resale unit. You will also want to look at things like employee turnover and speak to current employees to learn whether or not they are interested in continuing on with the business once ownership is transferred. If not, you may have the burden of hiring and training a new team very early on. Another thing you will want to examine is the state of the building and equipment – has everything been serviced regularly? A repair to a machine may seem minor but it could cost you a great deal.
The sale of an existing franchise unit can be complex. Not only do you have to understand the motives and terms of the seller, but you must also understand the role and requirements of the franchisor. Due to the complicated nature of these types of transactions, it’s absolutely imperative that you consult a business law attorney who can help you perform your due diligence and make sure all of the proper legal steps are taken during the transaction.