In the broad market of franchising, the difficult decision of what franchise to invest in and how to evaluate a franchise offering can be compounded when you open up your investment opportunity to the world of resale franchises. A resale franchise is an existing franchise that is already existing franchise business is being offered for sale. It is essentially purchasing an existing business which is a franchise. A resale franchise purchase requires the similar characteristics and attention to detail that the purchase of an existing business requires with an added level of attention to variables associated with the franchise offering. When you purchase a franchise business you subject yourself to the rules, regulations and brand that comes with the franchise system. A good franchise resale investor will review and analyze the FDD and associated franchise information that relates to the franchise offering as carefully as the financials and particulars related to the operating business they are purchasing. Good franchise systems come with franchise marketing systems, strategic value propositions and economies of scale. As in any business investment, the risk of making a bad decision is losing all your capital in the investment, but the upside of a strong franchise resale purchase can be significant if you join the right franchise brand that is leveraging the network to support unit level economics. With proper investigation, you can uncover whether the franchise resale you are purchasing comes with the positives you want with your investment.
How do you find franchise resale opportunities? Most franchise resales are listed on traditional business brokerage platforms such as the business for sale sites and through business brokers. A good example would be The Business Exchange where you can search hundreds of resale franchises. There are some business brokers who specialize in franchise resales and will list the opportunities as part of their portfolio. There are some unique rules in franchising that pertain to franchise resales in that the franchise is technically being purchased from the franchisee as opposed to through the franchisor. For example, you are permitted to see all numbers and financial information on the existing franchise operation where a new franchise would be limited to what is disclosed in the Item 19. Also, some states do not require registration like California if the franchise is being purchased as a resale from an existing franchisee. Some franchisors, such as Anytime Fitness, will market their franchise systems directly through the franchisor and are diligent about supporting franchisees in selling their units to avoid closings in the network. If you find a brand that interests you in particular, I would recommend contacting the franchisor and getting on their mailing list to be updated on new franchise resale listings.
How do you value a franchise resale investment and how much should you pay for a resale purchase? Traditional business valuation mechanisms can be used to value a franchise resale purchase, but if you haven’t purchased a business before, you should absolutely retain the help of a qualified business broker or valuation expert. Generally, a franchise resale will be valued at 1-3 times the EBITDA (profit) generated in a year through the franchised business. The range will vary depending on how consistent the revenues and profitability is, highly transactional franchises will typically have a lower ratio of profits for a valuation. Generally, once you have determined the profitability of the business, you should deduct a year’s worth of royalties from that number as you will be required to pay the franchisor’s royalty immediately following the purchase of the franchise resale. Royalties will usually be between 4-12% of Gross Sales which is important to understand in that the franchisor is being paid on top line revenues as opposed to profitability of the business. When evaluating your franchise resale purchase, review the FDD and use the information available to you in order to understand the financial model. Item 19 will typically show you average revenues of other franchises in the system and the FDD will disclose franchisees in the network and those who have left the network. Take the time to call these people and interview them about their experience with the franchise model. The benefit to purchasing a franchise resale as opposed to a general business is the same as starting a franchise vs. starting a business on your own. Franchising does not completely remove risk inherent in an entrepreneurial venture. What the franchise model will do is provide information and tools to you which if used correctly can help you make a better investment decision.
Chris Conner is a successful Businessman with more than 14 years of successful experience in the franchise development field.
In 2009 Chris launched his Company, Franchise Marketing Systems, offering a unique performance-based franchise development strategy.
For more information on how to franchise your business, contact Chris Conner with Franchise Marketing Systems: Chris.Conner@FMSFranchise.com