• Expert Advice

Entering the world of entrepreneurship through franchising can be an exciting and rewarding endeavour. While many aspiring business owners choose to start a new franchise from scratch, there is a growing trend in the market for buying resale or existing franchise stores. This approach offers a unique set of opportunities and challenges that require careful consideration. In this article, we’ll explore the key questions prospective buyers should ask both the franchisor and the previous franchisee, and we’ll examine the advantages and drawbacks of purchasing a resale/existing franchise store.

Buying a Franchise Resale

Buying an existing franchise can minimise risk and existing contracts make the initial years more financially predictable because of a positive cash flow from day one.  These are excellent reasons for buying an existing franchise business rather than a new franchise. You must bear in mind though that when you buy a franchise resale you may be paying more upfront, as you will be buying an established customer base.

Questions to Ask The Franchisor:

The Reasons For The Resale

• Why is the exiting franchise store up for sale?
• Are there any specific challenges or opportunities associated with this particular store?
• How does the performance of this store compare to other locations in the franchise network?

Investigate The Financial Performance

• Can the franchisor provide detailed financial statements for the existing franchise store?
• What are the historical revenue and profit margins of the store?
• Are there any outstanding financial obligations or liabilities the buyer should be aware of?

The Franchise Agreement Terms

• Will the buyer inherit the existing franchise agreement, or will they need to sign a new one?
• Are there any changes in fees, royalties, or terms when purchasing an existing franchise store?
• What support and training will the franchisor provide to facilitate the transition process?
• Is there a remodel clause in the agreement?
• Will the landlord renew the lease?

Market analysis

• Has the franchisor conducted a recent market analysis for the location of the resale store?
• Are there any upcoming changes in the market that could impact the business?
• What ongoing support and marketing initiatives will the franchisor offer to maintain and grow the resale store’s customer base?

Questions to Ask  The Previous Franchisee:

The Reasons For Selling The Franchise

• What motivated the decision to sell the franchise store?
• Were there challenges or issues faced during the ownership that the buyer should be aware of?
• How satisfied were they with the support received from the franchisor?

The Day-to-day operations

• What does a typical day in the operation of the franchise look like?
• Are there any specific skills or knowledge required to run the business successfully?
• What are the busiest and slowest periods throughout the year?

Gain Financial Insights

• Can the previous franchisee provide detailed financial records for the past few years?
• Were there any unexpected expenses or financial challenges they faced?
• How consistent has the revenue been, and are there any seasonal fluctuations?

Employee and Customer Relationships

• How is the relationship with existing staff, and is there a high turnover rate?
• What is the current customer base like, and are there any particular customer demographics that should be considered?

Advantages and Drawbacks of Purchasing a Franchise Resale:

The Advantages of buying a Franchise Resale includes:

• Established Brand Presence 

The franchise concept already has presence locally, regionally, and nationally and is known to consumers. Where a certain mature brand is already operating in many locations with not many new sites available, purchasing an existing store is generally the only way to acquire this franchise business.

• Established Customer Database 

Clientele/customer database of the franchise already exists – therefore the business has cash flow from the first day of takeover

• Proven business model 

Reduce the risk associated with starting a new business by adopting a proven franchise model.

• Trained and Skilled Staff 

The business already employs staff who have the skills and training to function properly.

• Existing Infrastructure 

Equipment, infrastructure, and premises already exist, which saves you the headache of trying to acquire and put these in place.

• Potential Growth 

Opportunity to expand and improve upon an existing successful business. The buyer has an existing base from which to grow the business (existing historical data is useful for future strategic planning)

• Immediate Cash Flow 

Start generating revenue from day one, avoiding the challenges of building a customer base from scratch.

As much as there are many positive aspects regarding this type of business, there are also sometimes negative aspects to these businesses which financial institutions may consider risks.

Some Drawbacks of Purchasing a Franchise Resales Includes:

• Inherited Challenges 

The store may come with existing problems or challenges that need to be addressed.

• Old Premises and Equipment 

The existing Franchisee may have old premises and equipment, which you may have to modernise.

• Transition difficulties 

Adapting to the existing business culture and managing potential resistance from staff or customers. There are also, in some cases, existing businesses which have been allowed to deteriorate and winning back former customers can be very difficult

• Price considerations 

The resale price may be higher than the cost of starting a new franchise depending on the store’s performance and reputation.

Is it Better to Buy a Franchise Resale Store or Establish a New Franchise?

The decision between buying a resale store and establishing a new franchise depends on various factors, including

• the buyer’s risk tolerance,
• financial resources,
• and business goals.

Buying a resale store offers the benefits of immediate revenue generation and an established customer base but comes with the risk of inheriting existing challenges. On the other hand, establishing a new franchise provides greater control over the initial development phase business but requires more time and effort to build brand recognition and customer loyalty.

Conclusion

Purchasing a franchise resale or existing franchise store can be a strategic move for entrepreneurs looking to dive into the world of franchising. However, its crucial to approach the decision with careful consideration, thorough due diligence, and a clear understanding of the responsibilities and potential challenges involved. By asking the right question to both the franchisor and the previous franchisee, prospective buyers can make informed decisions and set themselves up for success in their new venture.

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Read more: Don’t overpay for a franchise