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Buying a Franchise? Consider Purchasing an Existing Franchise
Posted by Ed Teixeira
Acquiring an existing franchise can provide a number of benefits compared to a start-up operation. If the purchase price and territory meet your needs and you exercise proper due diligence, you could be off to a fast start with the potential for faster profits.
Advantages over a Start-up Franchise Operation:
- The current revenue stream of an existing franchise has value and provides an advantage versus a brand new franchise.
- Sometimes, a new franchisee brings a level of enthusiasm and creativity that will translate into added sales.
- A franchise resale is already equipped and in operation.
- Buying an existing franchise can save time and may save money in comparison to starting up a new franchise.
- The price of a franchise business could be the same or even less than the investment requirements for a start-up franchise; since people sell for various reasons, including personal or financial factors, there may be a good opportunity available at a below-market price.
- For those who seek a franchise in a particular geographic area, a franchise resale may be an option in cases where new franchise territories are limited.
- There is a strong possibility that an existing franchisee selling his or her business will offer buyer financing.
Finding a Franchise for Sale
If you're interested in a specific franchise program, contact the franchise department to indicate your interest in acquiring an existing franchise. Most franchisors prefer not operating company owned locations and prefer to have a database of potential buyers. Some large franchisors have franchise resale websites.
- If you have an interest in a specific area or territory, you could speak with the current franchisee and indicate your interest in buying a franchise. If you're uncomfortable asking the franchisee, use a third party.
- Look for business listings in local newspapers. Individual owners and business brokers will often list a business in the business opportunity section of their local newspaper
Performing Due Diligence
Once you've identified a franchise business for sale, established a purchase price and met the franchisors qualifications, the next step in the process is to conduct your due diligence.
In addition to the typical due diligence involved in the purchase of any business, purchasing an existing franchise presents other considerations. Unlike a brand new franchise, an existing operation has obligations and commitments including leases, vendor accounts and franchise obligations. Be sure to utilize your attorney and accountant in the due diligence process.
Following are some Important Items to Include on your Checklist:
- Are there any outstanding franchisor obligations? This could include a required remodel, which the buyer could inherit.
- When you sign a new franchise agreement, will the royalty, franchise term, territory or other key provisions remain the same? Has there been an increase in the advertising fund contribution, which isn't reflected, in the current financials? Be sure that key provisions of the franchise agreement you'll sign are compared to the agreement the franchisee is operating under to identify any changes.
- Are there enough years on the lease to protect the value of the location? Location can be critical to future success. Conversely, a franchise which has not performed to its potential may require a change in location.
- Have there been changes in the market or territory? Look for any recent changes in the territory or market that could impact revenues. There is a significant difference between a franchise operating within a strong market area versus one that is under siege from other franchisees and competitors.
Be sure you use qualified professionals to assist you throughout the process.
Posted on January 3, 2011 at 11:19 AM
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