Palm Beach Atlantic University’s Rinker School of Business takes a deep dive into the value of small-business resales
A study conducted at Palm Beach Atlantic University’s Rinker School of Business has documented that franchise businesses fetch more at resale than non-franchise businesses.
Three PBA Rinker School faculty researchers examined 2,159 business resales that occurred over a decade. From the data, they determined that franchise resale prices were 1.5 times as much as those of non-franchise businesses. Small businesses in the franchise industry’s food/restaurant (non-grocery) category sold at .5 times higher price than other personal and professional small business categories
The peer-reviewed study was conducted by Drs. John P. Hayes, CFE; David Smith; and Mary Kay Copeland; all are faculty members at the Rinker School in West Palm Beach, Fla. Hayes also serves as director of PBA’s Titus Center for Franchising.
Why study franchise resales?
“There have been numerous studies about small-business development and drivers for success in business,” Hayes said, “but not much research that examines small-business resales. With the aging of franchising comes more resales of franchise businesses, so we decided to look at that topic specifically. Our research focused on the variables that may have a positive impact on the value of a small business resale.”
Hayes said the study’s findings confirm that a branded franchise adds value for the small-business owner. “If two people operate the same type of business over a period of years and enjoy similar sales, the franchise business is more likely to sell at a higher price point. Business owners ought to be aware of that information in advance of launching a business.”
The study – “Determinants Impacting Resale Premium Disparity When Selling a Small Business: A Predictive Non-Linear Approach” – will be published in the fall issue of the Journal of Business and Economic Studies. It delivers food for thought for future small-business owners.
Advantages of a franchise resale
There are many benefits to a franchise resale. Some of these include:
- A track record that will help you create accurate revenue forecasts.
- The premises have already been built out and furnished.
- You already have customers, a workforce and a supplier network.
And there are further advantages. For instance, with a franchise resale, you avoid the stress and initial low revenue of working through the start-up period. You’ve got a franchisor backing you up on marketing, customer-service advice, materials ordering, and trouble-shooting. Cash flow has been established because the site is already up and running.
Many potential investors fear that a franchise resale means they’re trying to rescue a business that might be in a death spiral. But franchise resales can pop up for many reasons. Maybe the franchise owner is burned out, has a health challenge, wants to retire, wants to chase a different dream, etc.
Do your homework
Before undertaking a franchise resale, do your due diligence as a buyer and learn what is expected of you as a franchisee. For example, do you have the necessary capital in hand to qualify for the purchase? Ask the franchisee and the franchisor why the unit is being sold. Do a deep dive to learn about your territory and what competition exists nearby (this includes other units of your franchise brand) and within it. Figure out whether there is a robust customer base you can attract in your territory.
Finally, do some soul-searching. Are you the type of person who can and will follow the franchisor’s proven steps for success?