Considering Buying a Franchise as a Going Concern?

Buying an existing franchise for resale provides access to a ready made customer base. What should you take into account when considering investing in a going concern?

Opening the doors to your business on day one must certainly be a nerve-wracking experience. Now you’ve built it, will they come? Even with the setup and ongoing support of a franchisor, building a business is a gruelling effort with plenty of long days and short weekends. No wonder that many people look to take a shortcut by purchasing an existing business as a going concern. With an established customer base, local brand awareness, existing staff and an established premises, you can concentrate on taking the business on to its next level using real results and rewards as a starting point.

Many business owners build an exit strategy into their business plan from the start in order to realise the capital value of their asset, possibly to fund retirement or even plough back into a new start-up.

Of course other businesses are put up for sale not because the owner planned to do so, but because they are struggling to make a go of it, finding the hours too much or have tired of the industry they’re in. Or perhaps personal circumstances outside of the business have forced the sale, such as divorce or bereavement. Finding out the reason behind the sale is probably the most important research any prospective buyer will accomplish during the transaction, as this will have a huge bearing on the buying decision and sale price.

Existing franchise businesses can be made available for resale too. This is often encouraged by franchisors, who are keen to see franchise owners that have plateaued in their growth ambitions capitalise on the value of their enterprises and move their business into the hands of an individual eager and able to continue charting expansion.

Buying an established franchise can offer the best of both worlds – an established customer base and existing financial performance along with the comprehensive training and support of the franchisor to smooth the transition of ownership.

If you have the capital ability to look at buying a going concern, how do you ensure you are buying the business of your dreams and not someone else’s folly?

Get Professional Advice

Remember, a broker is acting on behalf of the seller so it is important to get your own advice from accountants and lawyers to check over the accounts, lease and sale agreement.

Bear in mind, however, that as you are paying for warnings, advisors are naturally going to point out everything that could possibly go wrong. You must balance their concerns against your own expectations of what could go right.

Check The Business’ Third Party Agreements

For example, a business with a shortly expiring lease and no option to renew can quickly find itself homeless and losing its customer base. Similarly exclusivity agreements with suppliers need to be checked, although these are likely to fall under the remit and protection of your franchisor. If vehicles and equipment are leased, check the contracts and also the condition of the current stock.

Discuss How You Will Achieve Customer Retention

The least the owner should be prepared to do is arrange to formally introduce you to your customers. Some sellers may even consider linking the purchase price to a certain percentage of customer retention over a period of time.

Get A Realistic Estimation Of The Hours Required To Run The Business

Business ownership is rarely a 9-5 occupation, and especially if the business is struggling you may be required to put in nights and weekends. Don’t leave yourself any nasty surprises.

Suggest Seller Financing

Loans on businesses are hard to come by at the best of times. If the seller is prepared to accept a down payment this demonstrates faith in the prospects of the business.

Agree A Hand-over Period

In most business transactions the seller will be required to stay on for a transitional period. The franchisor will be training you to operate the business, but nothing beats the intricacies of the local-specific knowledge of a franchise owner and the value of the seller’s market knowledge is as much a part of the value of the business as everything else.

Check The Local Market

What’s the level of competition? Are there any planned developments nearby that could bring competition to you? It’s also a good idea to talk to other business owners in the area to get a feel of the market conditions and their opinions of your prospective business.

Calculate Your Own Valuation Of The Business And Get Ready To Haggle

Don’t just accept the seller’s or the broker’s valuations. You will want to base yours on a multiple of the business’ annual returns, but also take into account the seller’s need to sell – how long has the business been on the market? It’s rare for a business to have a number of buyers vying for them so you are likely to be in the driving seat.