Franchise re-sales are a very interesting topic for me. Franchise re-sales sit at the intersection of Business Acquisitions and Franchise, two spaces in which I have deep experience and knowledge. In my franchise consulting practice, I have many candidates who approach me with a specific goal of finding franchise re-sales.
In going through that examination, there are some crucial questions to ask that will help the vetting process by uncovering important facts to enable the candidate to judge the opportunity.
Question 1 – Why is this for sale?
This is the most basic question in the acquisition world. From my experience, there are “good” reasons and “bad” reasons to see a business for sale. In most basic terms, good reasons are usually associated with family, and bad reasons are associated with the business. Let’s dig deeper.
In my experience, “good” reasons are typically associated with personal life changes for the seller.
It is normal for a seller to be interested in a divestment based on (1) approaching retirement age, (2) family re-location for their spouse’s job, or (3) birth of death in the family. All these life events change the dynamic of how the business fits with the owner’s personal life and logical reasons why a sale would be advantageous at that point in time.
However, “bad” reasons are normally related to the business itself and not the owner’s life outside the business. Examples of bad reasons include (1) difficulty in hiring or retaining labor, (2) increasingly competitive marketplace, and (3) below target financial performance. All of these can be realities in business ownership but point to an opportunity that has built-in operational challenges from which the current owner is attempting to escape.
It is imperative for the prospective buyer to know the “why” and then evaluate if the business is still attractive based on the reason for sale.
Question 2 – Why did other franchisees not buy it?
One of the built-in advantages in a franchise system is that the most frequent exit in many franchise systems is to a neighboring franchise owner. These owners have the advantage of already possessing operational skills to execute the model well from day one.
If these owners did not acquire the business, it could be a red warning flag. You need to take notice and try to understand the story.
It is possible that other owners may have separate growth plans or are located too far away or have found their own happy status quo. But it may also be that the owners saw challenges that caused them to turn away from the opportunity. In a franchise system, you need to examine this question and find a satisfactory answer.
Question 3 – Could I buy it cheaper from the franchisor?
If you are considering the acquisition of a franchise, it is important to compare the asking price for the re-sale business to the estimated cost to open a completely new franchise.
In some instances of poorly performing franchises, the asking price from the owner may be higher than your cost to open a completely new location. How? The seller is simply trying to re-coup capital they have previously invested without any evaluation of the true worth of the business. Your evaluation of value should be based on the capital you would need to invest to build a profitable unit in that franchise. What happened in the past to the seller is not relevant to the value today.
Are you in the middle of a franchise investigation and seeking some guidance? Do you want to discuss franchise re-sales in more detail?
You can contact Chris Cynkar at ccynkar@franchoice.com or www.chriscynkar.com.
