Evaluating a Franchise? Franchise Resales an Important Consideration
by Ed Teixeira
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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