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Evaluating a Franchise? Franchise Resales an Important Consideration

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Individuals considering a franchise opportunity should include the potential for a franchise resale as part of their due diligence process.  Having an exit strategy is a critical component of any new business start-up.

It’s safe to say that most franchisees purchase a franchise with the intent of selling it someday or in some cases enabling their children to take it over. For this reason, the resale potential of a franchise should be an important consideration when evaluating a franchise opportunity. It’s been my experience that the resale factor doesn’t receive the attention it deserves. In terms of franchise resale’s the current economic uncertainty in the U.S. serves as a reminder of how quickly things can change. A recent article in the Wall Street Journal entitled “The Economy Stole My Retirement” By Sarah E. Needleman and Emily Maltby presents the challenges today’s small business owners face as they attempt to finally sell businesses they started many years ago. Since the U.S. economy is cyclical there are no guarantees that a post recovery recession will not occur in future years.

Despite the administrative hurdles a franchisees faces when selling their franchise, including franchisor consent and a first right of refusal, selling a franchises has some advantages versus selling an independent business.

As part of the due diligence process, a prospective franchisee is able to obtain information regarding franchise resales. The Business Brokerage Press provides rules of thumb for franchise valuations.  It’s a good way to gain an understanding of particular franchise and franchise sector values.

Here are some suggestions:

  • Review Item 20 in the franchise disclosure document and look under Franchise Terminations and Franchises Reacquired by Franchisor. Ask the franchisor if any of the terminations were part of a franchisee resale. Also, if there are any franchisor acquisitions of existing franchisees were they positive transactions or did the franchisor simply pay a modest amount in order to save the location or avoid litigation?
  • From the list of franchisees contact those that were terminated and find out the reasons for termination.
  • Ask the franchisor how many franchise resale transactions have taken place in the past 3 years.

Note: If you’re dealing with a new or small franchise system this information will be limited.

Individuals that are considering a franchise opportunity should include franchise resales as part of their due diligence checklist. Knowing the potential resale opportunity for a specific franchise is an important piece of information.

© 2012 FranchiseKnowHow, LLC

Ed Teixeira is the President of FranchiseKnowHow, LLC. He can be reached at franchiseknowhow@gmail.com

 

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