valuation of the business

What is a franchise resale?

Are you considering self-employment through franchising? If so when you have been researching franchises for sale you may have come across the term franchise resale, but what is a franchise resale?

A franchise resale is a franchise business that is already trading. A person has invested in the franchise & acquired what is called the franchise territory, or area in which they will trade for the franchise business owner or Franchisor. A franchise resale could be a relatively new business or it could have run for many years.

Why buy a franchise resale?

Franchise resales can be very attractive for a number of reasons including;

  • Much of the risk of launching a new business is in the first 2 years. By acquiring a franchise resale it is possible to eliminate more risk as the task of getting the business off the ground has already been completed.
  • Faster growth – If the above start-up is completed & the business is well know in your area it makes the task of growing the business far easier.
  • Existing infra-structure – The business should have implemented the Franchisors method or system & will have this along with equipment, staff & systems already in place.

 

Why would someone want to sell their franchise if it’s successful?

So if the business has been launched & running successfully why would anyone want to sell the business as a franchise resale?

There are many reasons why someone would wish to put their existing franchise business up for sale including;

  • Retirement – Most franchise agreements are 5+ years, many rolling agreements so many franchise resales are because of retirement of the existing franchise owners or Franchisee’s.
  • Health – If a Franchisee has poor health they may choose to sell their franchise as a franchise resale.
  • Franchise fatigue – This is a franchising term to explain when someone wishes to move on to a new career. A franchise agreement is usually 5+ years so sometimes people just want a new challenge & would rather sell the business.

How do you value a franchise resale?

This is a very popular question but a very difficult one to answer. Many experts will value a business for sale as a multiple of it’s net profits. Sometimes this can be 2-3 times the net profit, sometimes far higher. You need to consider what the franchise resale is worth to you. For example let’s say a franchise resale has been trading for 18 months. The business has not made a profit but has launched successfully, systems in place & the business is very well known in the franchise territory. If you valued this on a multiple of net profit it would have a zero value which is clearly wrong as most of the hard work & risk has already eliminated.

When you value any business you need to really look hard at the business, the accounts, the staff ( if any ), the systems in place & the reputation of the business in the area. You should also seek professional advice, financial & legal before investing in any existing business & carry out thorough due diligence.

What are the pros & cons of franchise resales?

Pros

  • Already launched, less risk
  • Potential for faster growth
  • Potentially lower start-up costs
  • Existing infra-structure, equipment & staff

Cons

  • Existing liabilities, careful due diligence required. This could increase premises, lease agreements, staff.

As with buying any franchise or business for sale careful thought & professional advice to conduct thorough due diligence is required. Before investing in a franchise resale or any business ensure you have the correct professional advice at hand & you understand all your obligations.

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