Buying an existing franchise offers a unique opportunity to step into a business that’s already up and running. Unlike starting a business from scratch, purchasing an established franchise allows you to bypass many challenges of launching a new business. With an existing customer base, trained staff, and proven operations in place, you can focus on growth right away.
Additionally, an existing franchise often comes with built-in brand recognition in the local community, offering a head start in earning customer trust. This can be especially valuable in competitive markets, where starting fresh might mean spending considerable time and money building your reputation.
However, buying an existing franchise also comes with unique challenges. To make a smart investment, it’s important to conduct thorough research and due diligence. This guide walks you through the key franchise buying tips to ensure you’re making an informed decision.
1. Understand the FDD
The franchise disclosure document (FDD) is a comprehensive legal document that outlines the franchise’s terms and obligations. It’s crucial to understand it fully before proceeding. Key components of the FDD include:
- Initial Franchise Fee & Ongoing Fees: Know what you’re expected to pay upfront and annually.
- Territorial Rights: Learn about your operational territory and potential competition.
- Earnings Potential: Review average earnings, but remember these are not guarantees.
- Franchisee Obligations: Understand training, marketing, and quality standards.
Pro Tip: Hire a franchise lawyer to review the FDD with you, ensuring no important details are overlooked.
2. Review Transfer Requirements
Many franchisors have specific requirements for transferring franchise ownership. Review the franchise resale process and ensure there are no restrictions that might prevent the transfer of the franchise to you.
- Right of First Refusal: The franchisor may have the first option to buy the franchise.
- Approval of New Franchisee: Some franchisors require interviews or Discovery Days to vet potential buyers.
- Training Requirements: Ensure you meet any prerequisites before the transfer.
If no rules are stopping you from buying, you should have a successful franchise resale!
3. Determine Business Value
In a franchise resale, getting a business valuation helps determine if the asking price is fair. Factors to evaluate include:
- Assets & Inventory: Are equipment and inventory in good condition?
- Financial Records: Scrutinize income statements, cash flow, and profit margins.
- Market Trends: Assess the franchise’s viability in its current market.
Some franchisors may do their own appraisal. However, you should hire an outside professional for an objective assessment. The American Society of Appraisers can connect you with certified professionals for business appraisals.
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4. Understand Why the Current Owner Is Selling
A franchisee may sell their business for a many reasons. For example, divorce, unexpected financial hardship, or retirement. However, their decision to sell could reveal red flags. Like a downswing in the industry, the franchise is failing, or poor quality of products or services.
If the franchise owner is selling because of a conflict with the franchisor, you may want to investigate further. Talk to other franchisees to get a sense of the franchisor’s reputation and the overall health of the business.
5. Examine the Financial Health of the Business
Request at least 3 years of financial records to ensure the business is profitable. Key documents to review include:
- Income Statements
- Cash Flow Statements
- Balance Sheets
- Profit/Loss Statements (PnLs)
By examining these records, prospective franchisees can understand the financial history of the small business.
Pro Tip: Hire an accountant experienced in franchises to help analyze the data.
6. Evaluate the Brand’s Local & National Perception
Customer perception can make or break a franchise. Learn more about the local and national reputation of the franchise business. Assess the brand’s reputation by:
- Reading online reviews for the specific location
- Talking to current employees and customers
- Researching the franchisor’s standing in the industry
- Discussing brand reputation with other franchisees
By learning about these perceptions, you can avoid investing in a business that requires a lot of damage control.
7. Analyze Franchisor Support
One of the biggest advantages of joining a franchise system is the support offered by the franchisor. Thoroughly research how the franchisor will support you long term. Review the franchise agreement, and ask questions about existing processes. Evaluate:
- Training Programs: Are they comprehensive and ongoing?
- Marketing Support: Does the franchisor provide resources to drive local and national advertising?
- Vendor Relationships: Are supplier agreements favorable?
RELATED CONTENT: Benefits of a Franchisee Support Network
8. Pay the Transfer Fee
Many franchisors require a transfer fee, which covers administrative costs and training for the new owner. The seller or the buyer can pay this fee, depending on the agreement for the franchise transfer. Typically, the new franchisee pays the franchisee who is selling the business.
As a new owner, include this fee in your budget when calculating the total cost of buying the franchise.
9. Plan for Staff Retention
Retaining experienced employees can ensure a seamless transition. Get to know the staff members and what they do. Some team members will be invaluable to the franchise, and in other cases, it may be best to hire new team members.
Remember that this is a stressful time for the staff members as well. They are worried about job security and may even have some hard feelings toward you or the selling franchisee. To build trust and minimize disruptions:
- Meet with key staff to understand their roles and concerns.
- Offer incentives to retain high-performing employees.
- Be transparent about your vision for the business.
10. Hire a Franchise Attorney
Hire a franchise attorney to review legal documents and agreements for the sale of the franchise. A franchise attorney can help:
- Negotiate terms with the franchisor and seller.
- Ensure compliance with state and federal regulations.
- Clarify complex legal language in the franchise agreement.
Investing in expert legal advice can save you significant time and money in the long run.
RELATED CONTENT: Benefits of Working with a Franchise Attorney
Final Thoughts: What Potential Franchisees Must Know
Buying an existing franchise can be a rewarding opportunity if approached thoughtfully. By conducting due diligence and leveraging professional support, you can position yourself for success.
If you’re ready to explore franchise opportunities, Caring Senior Service offers a proven business model with unparalleled support. Contact us today to learn more about our franchising options.