Opportunity for Sale
Starting a business from scratch is tough. This is why many people prefer to smooth their path in franchising with the purchase of a franchise resale. A quicker road to profits, no establishment headaches, an enviable customer base and a great location are just some of the reasons why franchise resales remain popular. People tend to re-evaluate their lives in January; this can mean selling a business or buying a business. This means we can expect to see new franchise resales coming on to the market in the next months.
Proceed with caution
With many benefits aside, like any other business decision a franchise resale must be approached with caution.
Here are just a few things that an aspirant franchisee should know when evaluating a franchise resale:
- Why is the franchisee selling the business?
- Has something changed with the location?
- How long has the business been operating?
- Is the business busy?
- Have certain operating costs (i.e. electricity or rent) gone up?
- Is the business profitable? Have profits dipped or risen?
- Is the business in a declining market?
- What is the relationship like between the franchisee and franchisor?
- What level of franchisor support does the franchisee receive?
- What are the franchise fees?
- What will a revamp involve and how long should it take?
- Does the franchisor have a revamp team?
- Is the equipment in good working order?
- Does the business have a manager?
- How much time does the franchisee spend in the business?
- How long have the employees been with the business?
- Can you find out what similar businesses have sold for?
- How many years do you expect to take to pay off the asking price?
The best way to learn about a business is to work there. Ask whether you can spend a few days with the franchisee to understand the business better and to see if you would enjoy working there. While you’re there you’d be able to gauge how busy the business is by how the phones and the tills ring. If the business is in a mall, spend an average week in the mall to see how many feet come through the mall and what type of feet they are.
Read more about the benefits and potential pitfalls of buying a franchise resale.
Found the perfect franchise to purchase? These are the things that a banks will considering when providing finance for a franchise resale.
|1.||Franchisor approval: The franchisor’s approval in writing.|
|2.||The legal entity: Whether you would be taking over the existing legal entity for the business (not usually advisable due to potential risks) or whether you will be a new legal entity for the business.|
|3.||The purchase price: The purchase price and how this was calculated. This would include the value of the assets and equipment in the business, stock, goodwill and the upfront franchise fee payment.|
|4.||Financial performance: The historical financial performance including whether it has been trading profitably. If profits have been poor or the business has been making loss, this would be investigated with business plans prepared to show how you plan to turn around the business.|
|5.||Affordability: The bank will look closely at whether a business can afford to repay its liabilities/loans from its own trade.|
|6.||Lease arrangement: The location may be very important to the businesses ongoing success. The bank would need to understand the duration of the lease, whether the existing lease agreement will be taken over or if a new lease agreement will be signed. The duration of the lease should, as a minimum, match the proposed duration of the loan.|
|7.||Revamp requirements: What finance is required to revamp the business.|
|8.||Legal compliance: If a business is being purchased as a going concern, the sale of business should be advertised as indicated in Section 34 of the Insolvency Act. The responsibility for this advertising is usually indicated in the purchase and sale agreement. You will require the necessary counsel to complete this; banks will require proof, as a financing condition, that the adverts have been placed in the relevant publications.|
Get professional advice
Buying a franchise is a serious commitment and one that demands some expert support. You will need a strong accountant with experience in evaluating businesses to help you conduct a due diligence and assess if the asking price is fair. Then you’ll also need a lawyer to help you draw up the purchase and sale agreement. This should be a lawyer that has experience in franchising to understand the nuances of the industry. While these costs may seem expensive, these pale in comparison with making the wrong business decision. As a first point of call drop us a line and visit our section on franchise resales.