If becoming a member of a well-known franchise family has always appealed to you, but the legwork involved in launching the new franchise location from scratch hasn’t, consider taking over a franchise that’s already in existence. There’s a litany of pluses involved in such a transaction, as well as a few risks and cautions.
- You’ll be up and running in no time. The greatest benefit of taking over an existing franchise is a simple one — it’s already in operation, which saves you from the hassle of going out and searching for real estate to purchase. Also, in many cases of franchise transferal, the current staff of the franchise will stay on, saving you from the stressful process of conducting interviews and hiring employees. Vendor delivery schedules will usually be nailed down and a solid customer base well established. In short, you’ll be able to get right down to the business of conducting business.
- You’ll have a realistic snapshot of past profitability. That said, one shouldn’t purchase an existing franchise with expectations of an immediately booming business. One of the reasons existing franchises sometimes go up for sale is that the franchisee bails out because the business wasn’t pulling in the kind of money originally envisioned. As someone purchasing an existing franchise, you will have complete access to the business’s monetary records and earnings history. If the numbers look solid, you can feel more confident about the purchase; if earnings seem less than stellar, don’t be afraid to walk away.
- You’ll avoid certain fees. Be sure to closely inspect the franchise agreement you’re entering into. In many cases you’ll enter into the existing franchise agreement, not a new one that new franchisees would enter into. This could be of great advantage to you, especially if the fees paid to the franchisor in the existing agreement are lower than what a new franchisee would have to pay. While you won’t have to pay the new franchise fee, you’ll likely have to pay a transfer fee, which can still be considerable. Sometimes the franchise fee is calculated as a percentage of the purchase price, so be sure to factor this cost into your initial offer.
Some important things to remember:
- Learn why the departing franchisee is leaving the business! He or she could be selling the business due to poor, unstable relations with the franchisor that may plague you as well.
- Investigate the area the franchise is situated in — are age, income, and race demographics shifting in a way that could negatively impact your business? Do your homework on market trends and predictions.
- The actual purchase price for the existing franchise will be something the exiting franchisee determines, or something the two of you determine together. Do know that nearly all franchise agreements give the franchisor right of first refusal when an existing franchise is up for sale (this means that the franchisor has the legal right to purchase the franchise before it’s offered up for public sale). There is usually a window of time in which the franchisor must make this decision (if they’re even interested in purchasing), so find out how long that window stays open.