It is no secret that the franchise sector has weathered the recent period of economic upheaval much better than independent operators. As a result, the popularity of franchising continues to grow and there is certainly no shortage of attractive franchise opportunities. What is often overlooked is that in addition to new locations, a growing number of brands offer existing outlets for sale. This offers enterprising individuals outstanding opportunities; this article explains.
Setting the scene
Let’s start by looking at the history of franchising in South Africa. The first franchise on record was a Steers restaurant that opened its doors in 1965. Because of its success, other brands were quick to follow. Today, about 550 franchises operate in a large variety of business sectors and serve their customers through about 30 000 outlets. That’s a lot of brands and a lot of stores. With some of them having been in operation for almost five decades, early franchisees are approaching retirement age.
Investing in a franchise is popular because its success is more predictable than that of an independent business. The franchisee starts out under an established brand, offers a tried and tested product or service and enjoys initial and ongoing support from the franchisor. This enhances franchisees’ success chances but some concerns remain.
A staff complement needs to be assembled and there is no guarantee that the new location will perform as well as the existing ones. Investing in a resale addresses these concerns because the business is already trading. This adds an additional dimension of predictability.
Potential pitfalls to look out for
Investing in a resale offers many advantages but this is a business transaction like any other and should be treated as such. We advise you to examine the following.
- Why is the franchise up for sale?
The owner wishing to retire is an excellent reason for offering a franchise for sale but is it the real reason? You need to establish how the franchise is performing in relation to other outlets in the same network and whether it is making money. You also need to look at customer relations, staff relations, supplier relations and a host of other issues that could impact negatively on the continued success of the business.
- Will the business remain viable in future?
While the past performance of the business will be of interest, its future prospects are what really matters. An outstanding past trading record notwithstanding, something could have happened to the area that reduces the attractiveness of the site. An example is a long-established shopping centre losing traffic to a new competitor down the road.
You also need to establish whether the staff will stay on, customers will remain loyal, the lease is acceptable, equipment is in good working order and the stock is not obsolete. You wouldn’t want to invest in the business, only to find that trained staff is leaving, customers were more loyal to the owner than the brand, the lease expires shortly, the equipment keeps breaking down and stock is unsalable.
- Examine the franchise arrangement
The franchise agreement will almost certainly give the franchisor the right to veto the sale. You need to know what it takes to be accepted as the new franchisee. You also need to decide whether you like the conditions the franchise agreement imposes on you, and whether you can work with the people at the franchisor’s Head Office.
It is best to establish contact with the franchisor at an early stage in the negotiations. The seller might not be too pleased with this idea but you need to stand your ground. Regardless of what they say, what most sellers want more than anything else is to get paid and walk away. You will be left with the business and an obligation to work with the franchisor for a very long time into the future. Assuming that you click with the franchisor, you should have little to worry about. The franchisor representative will guide you through the acquisition process and help you get a viable deal. Why? Because you will represent the brand in future and it would not be in the franchisor’s interest to sanction an arrangement that ends in tears.
Seek professional assistance
The acquisition of a business is a complex transaction. Unless you are familiar with the laws and conventions that come into play, consulting with professionals in the fields of accounting and law is essential. It will cost you some money but, given what’s at stake here, this will be money well spent. You are well within your rights to ask for a cost-estimate before you appoint an attorney or accountant.
- The accountant’s role
The accountant will carry out a due diligence investigation. This means that he/she will examine the business’s financial records and advise you on the commercial soundness of the deal.
- The lawyer’s role
The lawyer will examine the purchase agreement, the franchise agreement and the lease agreement for the business premises. Moreover, many people don’t realise it but if they purchase a business as a going concern, they become responsible for any outstanding contractual obligations and tax liabilities dating back to the period before the sale took place. An experienced lawyer can implement steps to protect you from this eventuality but this requires a thorough examination of all existing legal agreements.
- Total investment
If the outlet you are considering investing in is trading profitably, the seller will expect to make a capital profit. This could make the deal more expensive than the setting up of a new outlet of the same brand. On the upside, you can look forward to an existing clientele and established cash flow.