Looking for a Franchise? Consider Purchasing an Existing Franchise
by Ed Teixeira
If you’re thinking of purchasing a new franchise, you may want to consider
purchasing an existing franchise. Statistics indicate that, on average, a
typical business changes ownership every four years. Franchised businesses are a
part of this universe, and studies undertaken by the business brokerage industry
report that franchised businesses follow the same pattern.
The Purchase of an Existing Franchise Business can offer Distinct 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 Existing Franchises for Sale:
Since franchisors have a right of first refusal for the sale of an existing
franchise, the franchisor will be notified when a franchisee intends to sell. 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
- 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
- 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
- Visit business websites such as
www.bizbuysell.com, which is the largest Internet site
listing business for sale. There are a number of other sites
that list franchise businesses for resale.
- Contact local business brokers and/or visit their websites.
Franchise brokers who represent franchisors may also have
franchise resale listings.
The seller of an existing franchise is obligated to pay the business broker a
commission on the transaction. The buyer generally has to pay the transfer fee
to the franchisor, which may be buried in the purchase price.
The selling price is usually an important issue in any franchise resale.
Business brokerage expert Tom West, owner of the Business Brokerage Press, has
found that the larger franchise businesses command a selling price that is
approximately 10-20% higher than comparable independent businesses. Smaller or
newer franchise systems may have a problem with franchise resale’s, which can
preclude franchisees from obtaining a reasonable price for their business.
The method commonly used by business brokers to place a value on a small
business is the discretionary earnings or discretionary cash method. This method
relies on recasting the profit and loss statement, so that the entire seller's
discretionary cash ("SDE") is exposed.
This includes depreciation, owner's salary, and all non-recurring and
non-operating expenses. Other expenses are considered to be personal or not
actually necessary to the business.
The total of these items is then added to any net profit shown by the business.
Obviously, a net loss figure would be subtracted from the total. The resulting
figure is the cash that is available to the business owner to be used at his or
The term "Discretionary Earnings" has been defined by the International
Business Brokers Association (IBBA) as a substitute for terms such as Owner's
Discretionary Cash and Owner's Cash Flow. The IBBA definition for discretionary
earnings is as follows:
Once the actual owner's discretionary cash has been identified, a multiple
can be applied to that number to arrive at a valuation. Most small businesses
sell for 2 to 2.5 times this number.
In the case of a franchised business, some valuation models use a multiple or
a percent of annual sales. It's important to gather information regarding market
values for comparable businesses.
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.
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.
© 2010 FranchiseKnowHow, LLC
Ed Teixeira is the President of FranchiseKnowHow, LLC. He can be reached at
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