Franchise Resales Make Business Ownership Simple, but They Have Some Downsides. Here are the Pros and Cons of Franchise Resales.
As the franchise industry grows, entrepreneurs are taking advantage of the security and support provided by the franchise model; however, a way to reduce risk even further is to invest in a franchise resale. When a franchise owner retires, pursues other interests, or relocates, a new owner can take over the established location and pick up where they left off.
A study on the economic benefits of buying a franchise resale from Palm Beach Atlantic University’s Rinker School of Business concluded that franchise businesses get more money at resale than non-franchise businesses. The three researchers looked at thousands of resales over a decade and found that franchise resale prices were 1.5 times higher than non-franchise businesses. Additionally, small businesses in the food and restaurant sector sold at .5 times higher than other categories. But what are the benefits and downsides of buying a franchise resale? Here are some pros and cons to consider.
Benefits of a Franchise Resale
No Expensive Build Out
The build out process of a new franchise location can be costly. You will have to rent a property and renovate that location to the proper standards. The renovation process can take a while, depending on the industry. But with a franchise resale, the new franchise owner can start working right away and not have to worry about expensive buildouts.
Accurate Financial Forecasts
When you set up your franchise, you have a sense of a brand’s reputation and track record. Additionally, the Franchise Disclosure Document will provide you with information about the performance of other franchisess in the network. But keep in mind that predictions of how a franchise will perform in a particular area will not always be accurate. A benefit of a franchise resale is that this uncertainty is eliminated because you will access the previous franchise owner’s financial records. While not a guarantor of financial success, these records will give you a good sense of the location’s annual performance.
Built-In Fan Base
A significant benefit of franchising is branding. This means that many loyal repeat customers regularly come to the business. The local area may be aware of the business, especially if the brand has national recognition. But a new franchise owner still needs to market locally to get the word out about the business. A franchise resale reduces this necessity because the local population already knows about the business. This saves the new franchise owner time and money in building a customer base, leaving more time to focus on growing the business.
If a business has had any form of success, a lot of it can be attributed to a good staff. The previous franchise owner has already done the hard work of training employees to operate the business properly. As the new franchise owner, you will benefit from having existing employees. This will save a lot of time when it comes to hiring and training new employees. On top of being well-trained, these employees will have a good understanding of the values and culture of the franchise. Since the team will already be up to speed, the franchise owner can hit the ground running with a franchise that already functions at high capacity.
Established Supplier Network
As a franchisee, you may get a list of approved vendors from your franchisor to ensure a continuity of products across the business network. If you’re a new investor, you may have to figure out how much inventory is needed for your unit, and you’ll have to contact the proper suppliers to make a plan to get the products that you need. The franchisee will have to start this process from scratch if the franchisor doesn’t provide them with this information. A benefit of buying a franchise resale is that the business owner can simply use the previous franchisee’s supplier list. They’ll know how much and how often to order inventory, which is helpful in the beginning stages of owning a business.
Downsides of a Franchise Resale
Extra Due Diligence
A prospective franchisee should do the due diligence of finding out why the franchise is being resold. If the franchise owner is selling it after years of operating the business and looking to move on to other things, then that’s a positive sign. But if the location is being sold only after a few months of opening, that could be a bad sign. Some questions to ask the franchisor could include:
- Why is the franchisee leaving and selling the business?
- Will the existing staff still work at the franchise?
- Are there any changes in the local area that will impact the business?
An important part of the due diligence is speaking with a franchise consultant, who will connect you with a franchisor and give recommendations based on your experience, skills, and finances.
Terms of the Franchise Agreement Could Change
You also shouldn’t assume that you will get the same terms and conditions from the franchisor as the previous owner. These terms could be renegotiated, meaning that fees could be different from what you expect. The franchisor has the right to change the terms and conditions of the franchise agreement. It would benefit you to speak with a franchise lawyer to review the legal document to see if there are any red flags. Also, while franchisors usually won’t make you pay a new franchise fee, you or the selling franchise owner will likely be charged a transfer fee. Additionally, franchisors will charge you for your initial training program.
Overcoming a Bad Reputation
While buying a franchise resale comes with a built-in fan base, the franchisee could’ve sold the business because of a bad reputation. If this is the case, then you and your staff will have to work hard to improve its image. To do this, you can become more involved in the community through hosting fundraisers, sponsoring local sports teams, or offering discounts. While starting a franchise can be a huge undertaking, investing in a franchise resale can save you a lot of money, time, and headaches with a proven working system already in place.