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What a year it has been! No matter where you live, work, or play, the sudden onset of a pandemic has impacted that location. Your home hasn't hosted vacationing friends. Your kid's play areas might still be closed. And your workplace might be at home or, worse, non-existent.
But on the franchise business front, if you are looking for opportunities in franchising, the next several months will likely create opportunities for prospective franchisees to purchase an existing franchise site.
With businesses mandated to reduce indoor access or close entirely, some franchises have felt the effects of hard costs, like rent and utilities, as revenue declines. Unfortunately, some franchisees will be unable to provide the fresh capital needed to reopen, even if reopening is likely to bring back reliable revenue. This, however, creates an opportunity for those interested in purchasing such a pre-existing franchise unit, also called a franchise resale.
The Rewards of Buying a Franchise Resale
There are always risks in opening a business, but buying an existing franchise has some considerable advantages. In addition to the usual reasons for franchise success (proven business model, established branding, shared marketing), purchasing a pre-owned franchise has extra benefits.
- Existing customer base. Any new franchise normally must develop clients in the franchise territory, but an existing franchise already has a head-start on this front. Customers already know about the products, or appointments are already on the schedule.
- Lower initial capital needs. While requirements will vary by franchisor, a franchise site that has already been successful will not need the same level of operating cash to support the first months in business. Cash-on-hand demands will be lower when there is an existing site, phone numbers, websites, and inventory, for example.
Negotiating the Agreement
Since the seller already has a franchise agreement to honor, there will be several considerations to negotiate with the seller and the franchisor. The franchise agreement governs all franchise operations, and the sale of a franchise will still require compliance, but who pays for certain things could make the deal even more attractive to the buyer.
- Transfer fees. Usually, the existing franchisee must pay a fee to cover the transfer to a new purchaser, but this could be negotiated with the seller. And if a new buyer is especially attractive to the franchisor, it is also possible that the franchisor would reduce the fee.
- New franchise agreement. Any new franchisee will have a new franchise agreement with all its related parts. These will be standard, but a proven franchise unit might not have the same initial requirements that most new franchisees face.
- AP and AR obligations. A seller may have debts or other due bills the buyer must consider in the purchase. How these financial obligations are transferred (or not) can and should be negotiated and agreed upon before finalizing a deal. A new owner may not want to collect on certain aged account receivables (AR), for example. Accounts payable (AP) such as equipment leases/purchases and other payments might also be left out (with the equipment sold off or removed from the unit).
- Outside approvals. Third parties with a vested interest in inventory, AR, or equipment leases could have the right to approve any transfers of title in the business and its obligations. Obviously, that would limit what a buyer can negotiate, too, so every detail must be understood to best craft a purchase that makes sense.
If a new business for you means a pre-owned franchise, there will be good deals as we move into another year. Combined with the many benefits of starting with a franchisor’s support, the purchase of an existing franchise unit could be an excellent decision for an entrepreneur looking for a deal and some employment stability.
Anne Daniells is a co-owner of Enterprising Solutions, a professional services firm specializing in corporate communication and financial improvement for businesses where she shares decades of corporate and entrepreneurial experience—including franchise ownership—in her writings on business culture. She has authored hundreds of articles for publications including AllBusiness.com, TweakYourBiz.com, and MSN.com. Reach out via her website for more on where corporate culture, communication, and human architecture collide.