David Purves is a successful entrepreneur, but he has never actually started a business from scratch. In 1988, Purves took over an independent retail business in Newport Beach, California, and then two years later took over another store in Laguna Beach, California. Finally, in 2005, he went on to buy an existing Relax The Back franchise in Phoenix, Arizona.
Michael Manhoff opened his first The Maids franchise in Cleveland, Ohio, in 1999 and has since grown his business significantly by rolling an existing Medina, Ohio, location into his operations in 2005 and then taking over a midsize office in Columbus in 2008.
Sometimes the best business opportunities aren’t created anew but already exist. But buying an existing franchise requires a whole different strategy and blueprint than starting your own. Here are some pointers that will help guide you in the process of taking over a franchise that’s already in operation.
Before the Purchase
Do your research: As with the purchase of any franchise, you’ll need to do your due diligence to pick a franchise that matches you. That includes talking to franchise owners and thoroughly researching the market/territory that you will be purchasing, says Manhoff. However, when buying an existing franchise, Manhoff says you should be ready to take your research one step further and ask questions such as, “Why are the [current franchisees] selling? What problems running this business have moved them into a position to sell? Can you overcome those same problems?” Also examine the brand reputation in order to see whether the existing owner has caused any brand damage in the marketplace, advises Lonnie Helgerson, a 26-year franchise veteran and the author of Buying a Franchise – Is It Right for Me?
If the franchise is struggling, evaluate whether the operational deficiencies can be overcome: When considering the purchase of the Columbus office, Manhoff identified many areas that needed improvement, such as low employee morale, poor customer service, and excessive spending. Though the challenge was great, he felt that the franchise could be a good investment. “This particular market was very strong, and after taking an in-depth look at all of the deficiencies in the operation, it became clear that a good owner could turn things around fairly quickly,” he says. Under Manhoff’s guidance, the Columbus office experienced 40 percent growth in 2011.
Learn as much as you can: You may be on your own once the sale is final, but you have the upper hand while you’re still making a decision. “Plan to spend as much time as possible with the previous owners prior to the transfer date,” advises Manhoff. “They hold years of experience and knowledge of the market, customers, employees, and challenges you will face. Take as many notes as possible and ask as many questions as you can. Once the sale is final, previous owners will be less inclined to help out or share information than they were prior to the transfer.”
Remember that you might not have the final say: Just because you’ve found an opportunity that you’re excited about doesn’t necessarily mean that the sale is a given. There’s a key player who needs to be calculated into the equation: the franchisor. “Understand that the franchisor always has the right to approve — or not approve — the buyer of the new franchise,” says Leslie Kuban, a FranNet consultant. “A good franchisor will look at the skills of the buyer; their plans and goals for what they will do to turn around or grow the selling franchisee’s business; and their financial capability to buy the franchise, service debt if the transaction is financed, grow the business, and support personal expenses at home if the business is not yet producing sufficient cash flow to pay the new owner the compensation he or she needs.”
Find out what kind of support you can expect to receive from the franchisor: “Aside from initial franchise training, does the franchisor have a team that will assist the new owner in reopening the location?” asks Helgerson. Purves was thankful for the extra support he received from the franchisor in the actual sale of the franchise. “Unlike when I took over the independent businesses, there were people within the corporate office of the Relax The Back franchise that I could use as a resource in working through the process of taking over the business,” he says.
During the Purchase
Understand the franchise agreement: “Understand whether [you] will be taking over the seller’s franchise agreement or signing a new franchise agreement,” says Kuban. “If the former, understand how much time remains in their agreement and what obligations and costs [you] might be incurring at the time of renewal.”
Get professional help: Before you sign the franchise agreement, Manhoff recommends getting legal counsel to review it. “After that document is signed, you will have to live with terms you may or may not have realized you agreed to,” he says.
Perform an audit: Don’t assume that all the information supplied is correct. Helgerson recommends auditing the accounting records in order to confirm that the information you receive is accurate and the existing customers really do exist.
Take inventory: “Prepare an in-depth asset list as to what will be included in the sale of the business,” says Mahoff. “Make sure the list is exhaustive right down to the staplers on the desks. That way, on the day you are set to take over, there will be no surprise about what equipment will be in place.”
After the Purchase
Have your ducks in order and be ready to act quickly: “When taking over an existing business, a new owner needs to be prepared to jump aboard a train that is moving very quickly,” says Purves. “To have experienced people and a laundry list of resources immediately available makes a huge difference.”
Introduce yourself to your customers: Once the sale is final, don’t be afraid to put yourself out there as the new owner. “Develop a strong remarketing program,” says Helgerson. “Just because a new owner has taken over a location doesn’t necessarily mean customers will know that. The new owner should budget enough capital for a renewed marketing push in the community.”
Be mentally prepared to deal with the staff: When taking over an existing franchise, one factor — existing employees — may or may not be an asset. “Never ever buy an existing franchise with the expectation that the current employees will stay long,” says Kuban. “Most of the time they will leave, or you [will] want them to leave.”
Incorporate your culture from the beginning: “Try to do as much as possible initially to incorporate your policies and culture into your new business,” says Manhoff.
Plan for and expect surprises: Unpaid advertising bills, a list of existing customers who wanted refunds, and the IRS calling for about two years of back taxes were some of the surprises that awaited Manhoff as a new owner. “No matter how thorough you thought your due diligence was, there will be some issues you overlooked or were unaware of,” he says. “As long as you prepare for some of these surprises, it will be a little easier to take them in stride.”
Sara Wilson is a freelance writer who specializes in issues related to small businesses. Contact her at email@example.com.