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 ...
Full Answer
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 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. ...
How to finance the purchase of an existing business?
Financing Options when Acquiring a Business
- Seller Financing. Some owners who are selling their businesses are willing to loan buyers the money to purchase their business.
- Leveraged Buyout. ...
- Raise additional equity
- Mezzanine financing (subordinate financing) This is a hybrid form that combines debt and equity financing. ...
Should you start a franchise business?
There are many benefits to running a franchise, as there are benefits to starting a new business. The truth is, which one is right for you will depend on what your goals are and the type of entrepreneur you are. If you start a business from scratch, you’ll have your work cut out for you.
How do I purchase an existing franchise?
Here are some tips to guide you when it comes to a franchise resale.Understand the FDD. ... Review Transfer Requirements. ... Determine the Business Value. ... Discuss Why the Current Franchisee Is Selling. ... Examine Financial Records. ... Learn More About the Seller & Franchisor. ... Analyze the Franchisor. ... Pay the Transfer Fee.More items...
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.
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 a company buy back a franchise?
A breach of the franchise agreement can force the franchisee to sell the franchise back to the franchisor. Even in circumstances such as these, the franchisor will want to keep the best foot forward for public relations reasons.
Can you sell your franchise?
For most franchise owners this reward means selling their franchise business to a new owner for the greatest price and at fair terms. But, once the decision to sell your franchise operation is made, it doesn't take long for franchise owners to realize there are multiple paths to consider.
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 the concept of buying an old franchise business?
An existing Franchise will also have trained staff. There is no need for you to train them from scratch, since they will be well-aware of the business. You will have an idea about the actual revenue of the Franchise, which helps in deciding if you are to stick to the same marketing plan or to make improvements.
Why do franchises fail?
A leading cause of a franchisee failure is the franchisee being undercapitalized. A lack of sufficient working capital can be the result of a slow start-up or the franchise operation requiring more working capital than the amount disclosed in the franchise disclosure document.
What is the failure rate for a franchise?
Pretty much every year the survey has been conducted has shown between 8-12% of franchise businesses left their franchise each year. This is for a variety of reasons, including retirement, selling, ill-health and financial failure.
How do you sell a failing franchise?
Often the best answer to a franchise that is not succeeding is for the franchisee to sell the business to a third party who becomes the new franchisee for that territory. This allows the failing franchisee to terminate its obligations under the franchise agreement and under any lease.
What happens when you close a franchise?
Financial Implications You may lose monies you've paid into the business if your franchise agreement is terminated. This might include money spent on advertising and marketing, or monies paid to the parent company for the franchise agreement.
What is the buy back clause?
The buy back agreement definition explains that when an item or property is purchased, the vendor agrees to repurchase said item or property at a stated price within a specified period of time if a certain event occurs. A buyback is a provision of a contract.
How do you value a franchisor business?
Multiply the net cash flow. The number of times it should be multiplied depends on a couple of factors, including the stability of the business's cash flow and the forecasted business growth. To give you an idea, a profitable business is usually valued at between two and five times the net cash flow.
What are non quantitative factors in valuing a franchise business?
Qualitative Factors in Valuation are the different factors in the valuation of the business or the investment which are not possible to quantify directly but are equally important as the quantitative factors and include the factors such as quality of management, competitive advantage, corporate governance, etc.
What comes to mind when buying a franchise?
Financials are probably the first thing that comes to mind when you think about buying a business or franchise. But there’s actually quite a bit more that goes into either purchase, all of which deserves careful consideration.
What happens when you buy a franchise?
When you buy a business, you typically take over full ownership of that business. By contrast, buying a franchise is more like a license agreement than a purchase. Franchising comes in two main forms:
What is a franchise disclosure?
The franchiser is required by law to give you a disclosure statement (sometimes called an “offering circular” or “prospectus”) describing their franchise system and your obligations as well as certain required information such as the franchise’s litigation and bankruptcy history, and a list of current and former franchisees. This information will help you compare franchises, understand the risks, and set your expectations.
What to consider when buying a business?
However, it’s critical to do your due diligence and make sure that the business you’re buying is foundationally sound – for instance, you may not want to buy a business that has many debts that you may owe or need to collect. Also make a clear assessment of what you are buying: does the business come with the building, or is it still being leased? What equipment and assets will be included? For instance, if it’s a restaurant, will you be able to keep the menu and use the recipes? Will you take over the website and have access to the customer mailing lists?
What is zoning review?
Review the zoning for the property to make sure that the business conforms to the building code and that any changes or alterations you plan to make to the building are allowed within the property’s zoning requirements. Otherwise, you may need to make expensive or time consuming changes.
How to decide on a franchise?
Investigate the franchise business thoroughly, the industry and territory you’re considering, and compare it with other franchises. You can request detailed information directly from any franchise you are considering. Below is a list of considerations for deciding on a franchise:
What is the best professional opinion to obtain before investing in a franchise?
The advice of a lawyer is the most important professional opinion to obtain before investing in a franchise. A lawyer can advise about legal rights in entering a franchise agreement, any legally binding obligations, and may be able to suggest important changes in the contract to better protect your interests. They can also advise you of any state and local laws that may affect the franchise business, if the agreement is compliant with FTC regulations, and will assist with the taxation and personal liability questions that must be considered in establishing any new business.
What happens if you don't get a clearance before buying a business?
If you do not obtain a clearance before you buy the business, and if taxes are owed and the previous owner has failed to pay those taxes, you could be required to pay any taxes, interest, and penalties that are due. Make sure you have a clear goal and understanding of what it means to buy a business.
What are the key items to consider when evaluating a business?
Some key items include: Inventory and Assets. Conduct an in-depth assessment of the invent ory and other assets – such as furniture, fixtures, equipment and the building – so you can know its condition and value. This approach can also serve as a starting point to determine the value of the business. Zoning and Permits.
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 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.
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.
The Ins and Outs of Franchising
In simplest terms, franchising is a partnership established to distribute goods or services. It takes at least two parties to enter a franchise relationship - the franchisor and the franchisee.
Types of Franchises
Yes. A franchise opportunity allows small business owners to tap into a powerful arsenal of experience and knowledge. However, there are usually strict guidelines that franchisees must follow to remain in the partnership.
How to Evaluate Franchise Opportunities
If you're considering investing in a franchise, try not to look at it from the perspective of a consumer. Just because a particular franchise is popular doesn't mean that it's the right opportunity. You need to take a look at the entire franchising landscape.
Crossing T's and Dotting I's on a Franchise Deal
Once you've settled on an opportunity, you must vet the franchise thoroughly. At this stage, you want to recruit experts. Hire an accountant and an attorney to help you with the process.
The Biggest Challenge for Today's Franchise Owners
Consumer spending is up in 2019, which is excellent for franchise owners. At the same time, the labor market is tight, and employees are a vital part of operating a franchise.
What are the criteria to buy a business?
Some of the criteria you should keep in mind are the business ’ physical location, its industry, the size of the business, and the lifestyle you have versus the lifestyle the company currently operates under. These are great baseline figures to think about because, even though you’re buying this business, you’re integrating into something that already exists. So, if you go to a company that you’re not compatible with and try to force it into something that it’s not, it can be difficult to move forward.
What is the best way to find businesses for sale?
Searching on BusinessBroker.net is a great way to find businesses for sale.
Why is it important to ask questions when buying a business?
When you’re going into the process of buying a business, it’s vital that you ask the right questions, to dig deeper into why an owner is trying to sell a business. Doing so will help you find out if you’re making a sound investment.
Why do people dream of owning a business?
Many people dream of owning and operating a business, citing that it’s essential to achieving the American Dream. It’s not uncommon to hear stories of people saving every last cent they earn to start their own company and watch it flourish. But, as business and economic landscapes change, more and more prospective business owners are opting to buy existing businesses instead of starting from scratch.
What are some examples of business problems?
Examples of these include management problems, other disputes among staff and ownership, or even issues with equipment or resources that make running the business difficult. Burnout. Owning a business can be demanding, which often leads to burnout. Burnout can lead to declining revenues and discouragement of employees.
How many hours does an entrepreneur work?
Being an entrepreneur is often a job that easily exceeds the standard 40 hour work week. It’s natural to want to retire after getting a business off the ground and running it for many years, whether that means passing it to a trusted associate or selling the business altogether. Exploring a New Venture.
What happens when a business is liquidated?
Financial Turmoil. Even if a business is profitable, the business owner can still have made bad financial decisions that land them in hot water. When this happens, they see liquidating the business as a way to relieve them of debt or other financial burdens.
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.
