Buying an existing franchise
Buying an existing franchise business gives some distinct advantages over starting from scratch in your own business whether franchised or not. Principally the business has a history that you can investigate, which means that you will be able to establish the reputation of the business, the volume of business it conducts, its customer base, and its historical income and profitability. Buying an existing franchise business is no different from buying any other business and, as the principle is always "buyer beware", the following pointers should assist:
· You need written confirmation from the franchisor that they are not exercising any right of first refusal to purchase the business. Franchise agreements usually give the franchisor the right of first refusal in the event that the franchisee wishes to sell. The franchisor only has to match the price the proposed purchaser offers, and usually get 30 days or so to decide, so before you spend time and money on progressing the purchase ensure this right has been waived.
· You need to be clear as to whether you are buying assets or shares; is the franchisee a limited company? If the franchisee is a limited company then the seller, the shareholder of the franchisee company, will usually want to sell shares whereas a purchaser will usually prefer to buy assets. The winner of these opposed positions is likely to be the person with the strongest negotiating position – to be in a strong negotiating position you need to understand the implications of the different types of transaction and a commercial solicitor will be able to assist you with this.
· You need to ensure that you carry out thorough "due diligence". Due diligence is the process of asking questions to draw out information about the business. Part of this process can also be achieved through the inclusion of warranties in the asset or share purchase agreement.
· You should look at the location of the business as if you were starting a new business yourself. Don’t assume that your enthusiasm for your new business will ensure a better performance than the existing franchisee. There may be underlying reasons for poor performance such as the appropriateness of the business for the area and the amount, or quality, of the competition.
· Establish whether you will be subject to the existing franchise agreement or whether you are required to sign the franchisor’s then current agreement. If you are required to sign a new agreement this may be for the remaining term of the existing agreement and you will need to ensure the new agreement contains renewal provisions. A solicitor that is not used to dealing with franchises may not be aware of this and you do not want to incur fees for reviewing the wrong franchise agreement.
· Confirm that any existing senior employees will be staying with the business; such employees have already been trained and will ease the transfer of the business, but you cannot take their continued involvement for granted.· As with a new franchise business you need to make enquiries of other franchisees to establish the level of support that you can expect from the franchisor and to scrutinise trends in relation to the franchise business as a whole.