Franchising on the Rebound: Bargain or Disaster

Franchise resales could be an ideal way to obtain a existing business.  The most important issue to consider is why is the existing franchise up for sale.  Franchisee-sales can offer a golden opportunity or a ghastly nightmare.   With all the initial matchmaking involved in selecting a franchise and getting approved as a franchisee, why would it be up for resale?  Some reasons result from mismanagement by the franchisee. Other reasons involve a faulty franchisor business model.  The Small Business Administration provides data showing that less than ten percent of all franchise units in the U.S. fail each year, compared to forty-five percent of independent small businesses. This could mean that a failing franchise re-sale is likely an excellent opportunity for a savvy entrepreneur to turn a re-sale into a success.

A resale may be listed at a fraction of what the initial investment if fees and build out would cost.  Or, the price could be at a premium compared to buying an existing business.  If the franchisor has authorized the sale with severe limitations, the price may be steep.  If the franchisor has no takers within the franchise family, who would want to take on additional units, then it would be left up to the current franchisee to find a buyer.  The franchisee will want to  get the best possible price that will cover their lease and expenses so they can exit fast.  It could be comparing a prize opportunity to a disaster sale.  Hence, the existing franchise is offered at a premium price or a fire sale. One can’t presume that if the existing franchisee is on the market, it must be the individual franchisee, not the franchise itself that is failing.  When a franchisee lists their business for sale, something evidently is not going well.  It could be that the selected location was not ideal.  Or, it could be that the franchisee miscalculated the time, energy and effort required to make the venture successful.  Often the reasons are as mundane as retirement, health, relocation, return to former career, or they find the business to be different than what they signed up for.  This does not automatically mean a failing franchise can’t be salvaged and become a success. The first order of business is to consult the appropriate professional service providers and to ask questions of other franchisees in the area. If other franchisees are turning a profit in the same brand, this might indicate an opportunity for a successful turn-around.

Access to financing is going to be important. Usually, obtaining financing is much easier for an established business or franchise because banks recognize the history and potential sales of the franchise concept.   Banks know they have a better chance of receiving payments with interest from a business with a proven history and support system in place.  If the financials from the previous two to three years are not showing a profitable trend, then financing may not be an option.  This could result in further bargain pricing.

The resale asking price should, in most cases, have a close relationship to the levels of income the particular business generates.  If all is in order, a resale franchise should sell for three to four time sellers discretionary earning.  If this is not the case, a purchaser should suspect that there is an issue. Franchisors may have been over energetic about selling new franchises that are not fully developed. Consequently, discounted resales that are in default can be a remedy for unloading units and cutting their losses.

Since the required FDD doesn't disclose any new unit performance statistics, a resale buyer would get a better glimpse of the performance of the franchise by getting answers to questions involving revenue, costs, and cash flow questions not otherwise provided to a new franchise buyer.

Let the buyer beware!  Purchasing an established franchise can be the perfect opportunity to get into franchising through the back door.  One can learn from another’s mistakes-- whether the fault lies with the franchisor or the existing franchisee.  The sale will be a bargain or a disaster based on the urgency of the seller and the viability of the unit’s future profit prospects.