Venturing into a new business requires adequate background research. There are two options to buy a franchise: open a new franchise location or buy an existing one. Buying a new franchise differs from buying an existing one in many ways, including the business parameters to check for real estate conditions compared to site selection processes in the case of a new franchise.
Buying an existing franchise follows the same rule of conducting due diligence before making a business investment. This article discusses the various steps you should take before buying an existing franchise:
Understand the FDD Clearly
Buying an existing franchise requires that you take your time to understand the Franchise Disclosure Document (FDD) meticulously. This may require the services of a lawyer or franchise business consultant like Fransmart to clarify equivocal terms.
A prospective franchisee should consider fees, branding or advertising information, training, quality control, and indemnification. Every aspect of the agreement must be fully understood before moving forward with a franchise purchase.
Employ A Franchise Consultant
Since you have established your intention to buy an existing franchise, it is time to get help and use a no-cost franchise consultant to verify your findings further. Franchise consultants like Fransmart who have proven expertise in the franchise industry can help in your buying process. They will walk you through the process and review the provided legal documents and agreement before signing the legally binding agreement.
Here The Halal Guys franchisee Khurram Burney talks about his experience working with a franchise consultant:
When buying an existing franchise location you need to learn why the franchise unit is for sale. You may get some information from the current franchisee and franchisor and you can learn more via financial statements and sales reports which your franchise consultant can help you with.
Understand Transfer Requirements and Financial Risks
If you are considering buying an existing franchise, you should critically review the transfer conditions of the existing franchise to a new owner. Also, note the restrictions to transfer, if any, that may prevent the franchise from being transferred to a new owner. Transferring a franchise without following guidelines may impact losses and sanctions that could have been avoided if the transfer requirements had been followed.
You should also learn the financial risk of your potential investments. As an entrepreneur, you should ensure that the risk you are taking on is safe enough to manage in your business operations. Other risk factors outside your control, such as competition and economic conditions, should also be identified.
Determine the Business Value
You may assess the business’s value by evaluating factors including the current inventory, equipment, business goodwill, and assets. By making a critical valuation of your potential business investment, you will be able to determine the desirability and viability of the existing franchise. You may consider employing franchise business consultants like Fransmart to obtain the value of your potential investment objectively.
Businesses are expected to yield returns and an existing franchise should be able to provide up to 3 years of financial records for you to review. The financial records should include an income statement, balance sheet, cash flow statement, profit and loss statement, and outstanding debts. The business’ financial stand should be evident through its financial records. Therefore, negotiation opportunities for the existing franchise will begin to surface.
Learn About The Seller and the Franchisor
You must be able to distinguish between the seller/ vendor and the franchisor because they play different roles in the franchise sale. For instance, you need the franchisor’s approval to buy from a seller, especially when buying assets from the vendor, but not the right to operate a franchise as a buyer.
You should conduct a background check on both the franchisor and seller to determine the current standing of your potential franchise unit. By investigating the franchisor’s reputation, you will be able to decide on the brand’s market perception, which can help you make your investment decision.
Customer reviews on the franchisor’s brand are also critical when buying an existing franchise. Through your background investigation, you will understand how the franchisee conducts his business, which will ultimately help you identify areas to improve the franchise’s operations.
Make Payments and Sign the Transfer Agreement
Franchisors typically require a transfer fee payment before an existing franchise purchase can begin. This fee covers the franchise’s cost of evaluating you as a new owner and the transfer process. Transfer fee payments can either be imposed on the seller or buyer. The transfer fee is usually charged as a flat rate or as a percentage of the transfer cost.
You should sign the transfer agreement after reading its terms. The transfer agreement runs a tenure typically over five years for a new franchisee taking over an existing franchise unit. Ask questions from your franchise consultants to understand your rights and responsibilities under every clause.
Franchising is a lucrative business, and buying an existing franchise can be an easy option to become a franchise owner or to expand your current franchise holdings. If you consider starting a franchise, several considerations need to make before signing an agreement. Fransmart can help you evaluate the purchase of an existing franchise unit.