how to buy an existing franchise

How to Buy an Existing Franchise

• Find an Opportunity That You Like When looking to buy an existing franchise, you want to find one that provides some service or product that you are genuinely interested in. ...
• Understand the Financial Situation ...
• Evaluate the Owner ...
• Calculate the Financial Need ...
• Seek Owner Financing ...

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What to consider before buying a franchise?

What to Consider Before Buying a Franchise

• Make Sure Your Family is On Board. Owning a franchise—or a business of any kind—is truly a family affair. ...
• Count Your Cash. ...
• Reach Out to Other Franchisees. ...
• Do Some Soul Searching. ...
• Test the Product. ...
• Understand What You’re Getting Into. ...
• Talk to a Franchise Consultant. ...
• Come Up With an Exit Strategy. ...
• Consult With Franchise Experts. ...
• Do Your Due Diligence. ...

What are the pros and cons of buying a franchise?

The Pros and Cons of Buying a Franchise: Is it Right for You?

• Advantages of Franchising. Advantage 1: Explore a New Career, Work in a New Industry! ...
• Disadvantages of Franchising. Depending on which franchise you choose to invest in, the initial investment can be hefty, especially for big-name franchises.
• Overlooked Realities of Franchising. ...
• Advantages and Disadvantages of Buying a Franchise. ...

Should I buy a franchise or start my own business?

Buying a franchise is very different from starting a mom-and-pop business. Since there is an already established system in place, there is a higher likelihood of success. If you invest in a proven franchise opportunity and follow the system the franchisor has put in place, you should be on your way to running a successful business.

What are the steps of buying a franchise?

• Matches your financial resources
• Provides you with the lifestyle you imagined
• Uses your particular skills and experience
• Provides a recession-resistant product or service
• Has a majority of happy and successful franchisees
• Employs an experienced and enthusiastic staff of personnel who will help you achieve your dreams of business ownership success

What is the disadvantage of buying an existing franchise?

Buying a franchise means entering into a formal agreement with your franchisor. Franchise agreements dictate how you run the business, so there may be little room for creativity. There are usually restrictions on where you operate, the products you sell and the suppliers you use.

Can you take over a franchise?

That means that a new owner can either take an assignment of your existing franchise agreement or enter into a new agreement with the franchisor. Most franchisors include in their franchise agreements the right of first purchase or the right of first refusal.

How do you value an existing franchise?

Franchises are often valued based on a multiple of revenue, cash flow, or earnings before interest, taxes, depreciation, and amortization (EBITDA). As the name implies, the EBITDA method adds back some expenses to the earnings total, and a franchise can be valued at 4 to 5 times EBITDA.

Can you buy a franchise from someone else?

With a resale, you can sometimes negotiate the price, payment terms, training from the seller, and every other aspect of the deal. But although it's a new business, you also need to find out the terms of the agreement your franchisor is going to be willing to grant you.

How do you sell a franchise?

Whether you are ready to sell or you are just considering it, here are our top tips for selling an existing franchise:List your franchise for sale on FranchiseFlippers.com. ... List your franchise on other online business listing websites. ... Reach out to fellow franchise owners in your franchise system personally.More items...

How do you become a franchise owner?

Become a Franchise Owner in 5 Easy StepsDo every last bit of your homework. Just because you want to buy into an existing chain doesn't mean you don't have to do a massive amount of research. ... Incorporate or form an LLC. ... Inquire and apply to the franchisor. ... Obtain financing. ... Everything else.

How do you negotiate a franchise?

8 Things to Consider When Negotiating a Franchise AgreementFirst of all, never sign any agreement without negotiating. ... Negotiate extensions. ... Your right to obtain waivers in the event of the franchisor's company-wide decisions. ... Make sure that all fees are disclosed. ... Have as few requested changes as possible.More items...•

What is a franchise resale?

A franchise resale is when you buy an existing franchise business as a going concern from a franchisee with the rights to operate the franchise. It could be a sale of a company or a sale of the assets of the franchisee's business.

What is a good EBITDA for a franchise?

From a banker's perspective, EBITDA should be at minimum of 1.2 times the debt payment of the business. For example, a franchise with a monthly loan payment of $5,000 needs to generate a minimum of $6,000 EBITDA per month.

Can 2 people own a franchise?

The two individuals can then evaluate if they want to buy a franchise together and become co-owners of the franchise location. The site also has the ability for the franchisor of the particular franchise to be a mediatory on the site between the two potential franchisees.

What costs are involved in buying a franchise?

Costs involved in buying a franchiseFranchise fee. ... Franchise start-up costs. ... Working capital for financing a franchise. ... Ongoing franchise royalty fees. ... Ongoing franchise advertising or promotion fees. ... Other franchise costs.

What are the risks of buying an existing company?

The Cons of Buying an Existing Small BusinessYou'll Get What You Paid For. ... Significant Operational Changes May Be Necessary. ... You Could Get Scammed. ... It Can Be Challenging to Make It “Your” Business. ... The Business Might Have a Bad Reputation.

What is franchise acquisition?

Franchise Acquisition means the acquisition (whether by Acquisition or through the termination of any existing contracts (including the payment of any termination payments required thereunder) or any combination of the foregoing) by a Company or any Note Party that is a Wholly-Owned Domestic Subsidiary thereof (other ...

What is a franchise transfer fee?

A transfer fee is the fee a franchisor charges to the franchisee if the franchisee sells the business or shares in the company operating the franchise.

Which is more advantageous to you buying a new franchise or buying an existing franchise?

In general, proven franchises are a safer investment, but if the idea of breaking ground in a new franchise area doesn't faze you (or even appeals to you), then a new franchise might be a better option. To be honest, there's no right or wrong answer to the new versus existing franchise dilemma.

What are the pros and cons of buying an existing franchise outlet?

What are the Pros & Cons of Buying an Existing Franchise?Brand Reputation. If you are buying an existing Franchise then local brand engagement and reputation has already been created by the previous Franchise owners. ... Ready Customer Base. ... Trained Staff. ... Clear Expectations. ... Immediate Returns on Investment (ROI)

What to do if your franchise is small?

If it is a small operation, you may want to discuss the existing franchisee staying on as a consultant to help you get to know the ropes when it comes to operations, vendors, suppliers, etc.

Why do franchisees sell their business?

However, their decision to sell could be based on something more alarming such as a downswing in the industry, inability to work with the franchiser, or the franchise is failing.

What is franchise disclosure?

When considering a franchise, potential franchisees will naturally look over the franchise disclosure document (FDD), which is a legal contract between franchisee and franchiser. You should consider the following elements of the FDD: 1 Fees/Require Purchases 2 Branding/Advertising Information 3 Training 4 Quality Control 5 Indemnification

How to check if a franchise is a good fit for my business?

You can do this by checking with other franchisees to discuss how they feel about the franchisor and reading over the company's mission statement and vision. You can also look over customer reviews of the specific franchise you are considering and talk with existing employees.

What to look for when considering a franchise resale?

One critical thing to review when considering a franchise resale is to look at the prerequisites of transferring the franchise to a new owner. You must ensure that there are no restrictions in place to prevent the transfer of the franchise to you. In some cases, franchisees have the Right of First Refusal, allowing them the opportunity to buy the franchise back before the business is offered to an outside buyer.

What is the FDD for franchise?

1. Understand the FDD. When considering a franchise, potential franchisees will naturally look over the franchise disclosure document (FDD), which is a legal contract between franchisee and franchiser. You should consider the following elements of the FDD: Fees/Require Purchases. Branding/Advertising Information.

How long should a franchise keep financial records?

Naturally, you will want to buy a business that can produce results. The IRS suggests that businesses keep financial records for 7 years so the seller should be able to produce the financial records of the franchise going back at least 3 years. Financial records should include items such as: Income Statement.

Why buy an existing franchise?

By buying an existing franchise, you could have a proven successful business instantly in place with regular customers and a good cash flow. Because the business is already operating successfully, it will also be easier for you to get financing . You will also be able to look at the books and determine just exactly how profitable the business really is. Here are some tips on how to buy an existing franchise.

When looking to buy an existing franchise, what do you want to look for?

When looking to buy an existing franchise, you want to find one that provides some service or product that you are genuinely interested in. Since you will be working the business for many years, you want to look it over carefully enough to know whether or not you think you could perform the necessary tasks for a long time. If you don’t think you could – then it probably is not a business you should get into.

Why is learning about the financial situation of an existing business a challenge?

Learning about the actual financial situation of an existing business may be a challenge to discover, because the owner may not be willing to grant you the opportunity to actually look at the books.

What do you need to know when evaluating a business?

In the process of evaluating the business, you will need to know what you are able to afford, and whether or not the owner will offer to finance any of it. Once you think you know what it is worth, you will want to make an offer.

How long does it take to get along with a franchise owner?

This makes it essential to be able to get along well with the owner – possibly for several months. In addition, if you are hoping for partial owner financing, it becomes even more necessary.

Do you need to finance a franchise?

Unless you have money to pay for the franchise, most likely you will need the owner to finance some of it. This is frequently done when franchises change hands as a way to reduce taxes. Lenders are currently financing smaller percentages of businesses. Make sure that you are able to have some cash on hand for modifications and upgrades where needed.

Why is it important to buy an existing franchise?

The benefit of buying an existing franchise is that you can be up and running a lot sooner than if you had to start from scratch – and if you know what you are purchasing.

What happens if a franchisee turns down a sale?

If they turn down the sale because the purchase price is too high, the selling franchisee will not be happy. However, if they let you invest in the business and you are not able to service your debt or achieve a return on your investment, you are not going to be happy.

Why do franchisors want to see if you overpay?

Another reason that most franchisors want to review the purchase price and understand how you plan to finance the business is that they simply want to see if you are overpaying and if the projected cash flow from the business is likely sufficient to allow you to meet your debt service . There is little advantage to any franchisor if you overpay for the business and then can’t service your debt and fail. Keep in mind that this can be a very difficult decision for franchisors to make. If they turn down the sale because the purchase price is too high, the selling franchisee will not be happy. However, if they let you invest in the business and you are not able to service your debt or achieve a return on your investment, you are not going to be happy. Make certain you discuss this with your legal counsel and they can address this with the franchisor.

What is the advantage of buying an existing business?

The advantage of buying an existing and successful business is that it is already up and running. Compared to starting from scratch with a new location, you don’t have to choose a territory, find a site or go through the process of negotiating a lease, finding an architect, or hiring a contractor to build it out.

Do franchisees need to understand what they are buying?

But understanding why the existing franchisee wants to sell their business, understanding what that business is worth and, most importantly, understanding what you are actually buying is essential before you sign the purchase and sale agreement.

Is a franchisee business profitable?

But not all businesses, including franchisee-owned businesses, are profitable – just because the purchase price is going to be lower than the cost of starting a new franchise, the franchise may not be a bargain.

Can MSA help you with franchising?

MSA’s experts can help you determine if investing in franchising is right for you.