Franchise Resales

Table of Contents

What is a franchise resale?

Anyone who is exploring purchasing an existing business should consider looking into a franchise resale. This is a smart choice! Purchasing an existing business means that you do not have to work through the start-up period of any business—which can be rough. You are getting an operation with customers already coming through the door and trained staff. Or are you?

Purchasing a private, local business may seem like a prudent move, but the business might have only been successful because of the sheer force of will from the owner. They may not have systems or processes in place, the owner may have been doing much of the work, and the customers might not be all that happy.

With a franchise resale, you get an existing location, plus the added benefit of the experience of the franchisor. They will provide you with the systems and process for everything from hiring and training, to ordering products, and customer service. You get the best of all the possible options: cash flow and help.

When you buy a franchise resale you are purchasing a franchise location from an outgoing franchisee. There are many reasons a franchisee may be looking to sell. They may be retiring or moving to a new locale. They could also be struggling with their own ability to lead and manage a location, in which case, you may need to turnaround the franchise to help it reach its full potential.

A resale is slightly different from a normal business purchase. Unlike most privately-owned businesses, you can’t just sign papers and assume ownership. With a franchise resale, you need to work within the constructs of the franchisor. The seller will have been granted a territory from the franchisor to work within, so in addition to buying that location, you are purchasing the rights to that territory. 

As a new franchisee, you are expected to follow all the steps any franchise candidate would. You will need to be interviewed and assessed by the franchisor and have a discovery day at their corporate offices.

Remember, just because a franchise is for sale does not mean it wasn’t successful. Many franchise units are resold multiple times over the years for various reasons. In many cases, a unit that has been sold many times shows how successful it is. The previous owners sell to see the profits from their investment.

Are there advantages to purchasing a franchise resale?

Franchising itself is a great opportunity. Most people don’t realize they are using franchises when they do, with the obvious exceptions of fast food and some service locations. When you get your house painted or your lawn mowed, you are often using a franchise.

Even beyond the basic advantages of owning a franchise like the support of the franchisor, the proven processes and systems, corporate marketing, and name recognition, a franchise resale has additional advantages that a franchisee starting a unit won’t have.

  • Your unit is already open. There is no time to build the location or customer base. Having an existing location means your doors are open immediately to provide a return on your investment. Building a territory is a time consuming process and franchisees purchasing a resale have the opportunity to skip this step.
  • The brand is already known in the area. To get customers when building a business, owners will often have to dump money into marketing and pound the pavement to get the word out, this is not needed for a resale.
  • There is already a cash flow. Return customers will continue to purchase products and services and you will reap the benefits of extant revenue structures.
  • You won’t have to hire and train staff to open. The shelves will be stocked. All the development and asset requirements to run the business will have already been taken care of by the previous owner.
  • The location has a history which you can leverage for growth and planning.
  • Getting a loan may be easier due to the track record of an existing location. Securing funding is a major step for most franchisees, but with a resale, the loan officer can base their lending decision on the data of previous quarters and years of revenue. The location may already have a relationship with a bank that you can build on for success.

Why would someone sell a franchise location?

Owners come and go in businesses. Franchisees can be burned out. They can want to pursue other opportunities. Some even retire after many years at the helm of a successful location. 

There were more than 759,000 franchise locations in the United States in 2018. Franchises are everywhere. You might not even realize you are interacting with the franchise sometimes! The market for franchises is huge. It goes without saying that owners will leave and sell. It makes more sense to sell your successful location rather than close.

Why should I buy an existing franchise location?

The advantages of purchasing a franchise resale are plentiful. Anyone considering the purchase of a new franchise location should consider a resale. Part of franchise ownership is being willing to work within the systems of the franchisor (for your success), and if you are pursuing that, then you already have the right mindset to be successful.

Building a new location will take time. Do you want to skip the opening steps and go right to cash flow? Then a resale is right up your alley.

You will pay more for a resale than you would if you were building a new location, but that is understandable since you will have data of the location’s previous performance to analyze the potential profit you can expect. You don’t get that with a new location. You might pay 20-30% more than you would otherwise, but you will also have more assurances to your investment.

As a new owner of a resale, you will be able to skip over hiring and training new employees. Your staff at the location will have already been hired using the franchisor’s processes. And any location will have an existing client base to work from. A brand new location would need to build and cultivate those two areas before even opening its doors.

An existing location will provide you with profit and loss figures and any other monetary paperwork to help you make your decision. You will also be afforded the opportunity to verify those figures with the franchisor, who will often act as an independent third-party.

You can also ask to speak with staff to discover if they are following the franchisor’s proven systems and processes. And there is also no reason you shouldn’t ask to speak with some long-time customers to learn what their experience has been. This is all part of your due diligence and because you are purchasing an existing franchise, you will be provided with many baseline comparisons to gauge the relative success of the location you are considering.

How is a franchise resale different than buying a regular business?

When you are purchasing a franchise resale, you are buying into a franchise concept. That means it is more than a location and employees. You are going to be working with a franchisor and be working within their processes and systems. There are tremendous benefits to this, but you do relinquish flexibility with your business in many ways.

If you want to reinvent the way “X Restaurant” or “Y Hair Care” is run, a franchise resale is probably not for you. But if you are looking for a secure investment with support, resources, and provable cash flow, then a franchise resale is perfect.

In addition to purchasing from the seller, the franchisor will be involved in any transaction and that is a key difference. You not only have to negotiate with the seller, but the franchisor must accept you. That also means you will need to meet their ownership requirements, go through their training and discovery day. Each franchise has different rules for franchisees, therefore when you are looking into a franchise resale, it is important to investigate the franchisor as well as the unit.

How do you buy a franchise resale?

The steps to purchasing a resale will vary based on franchisor requirements, but there is a general flow to the process. In general, you need to ask all the same questions and complete the same amount of due diligence when purchasing a resale as you would with any other business purchase.

While having a third party (the franchisor) involved may seem like it can cause issues, or not be worth the effort, you have an added comfort due to their presence. They can corroborate information and collaborate with all the parties throughout the process.

Seller Overview

As a potential buyer, you need to ask the seller for a prospectus. This should be a detailed document that provides a full account of the business to allow you to make an informed purchasing decision. This document should be based on the specific unit, not the franchise. The franchisor will provide big-picture information.

What is required in the prospectus will be based on the type of business. But every business should provide sales numbers, revenue, profit, and outline of costs and overhead. A brick-and-mortar business will generally need to include a full outline of staff, a full account of assets, and any other concerns when operating a location. A service-based company may only need to list staff and some basic equipment.

Make sure the seller outlines the territory being sold. You want to know what areas this business will serve and how it is integrated into the marketplace. The reason for the sale should also be included in this document.

Unit Valuation

The seller will have an asking price for the location and now you must compare the prospectus to the asking price to decide if it is fair. The selling franchisee will likely receive help from the franchisor in developing an asking price for the location. If the valuation has been reviewed by an independent third party, not the franchisor or the franchisee’s accountant, that would be a helpful step in providing the clearest information.

As the purchaser, you should also find someone to make an assessment of the valuation. The most familiar the assessor is with franchises, the more accurate a valuation you will receive. If both valuations have been completed by independent parties, there will probably be a gap in the two numbers that can be negotiated.

Valuation is not a science. Often, valuation is based on revenue and multiplied by a certain number of quarters or years. No valuation will be exact, but it is the best guess a professional can make based on previous experience and results.

The Negotiation

Some people love this part, while others detest it. As a buyer you have the opposite goal of the seller, you want the best deal and they want the highest return.

The seller has the numbers to support the valuation, so as a buyer you need to consider your ability to do better than the seller to grow the business and achieve profitability. If you are worried that you can’t out-do the seller at the asking price, you will need to try to negotiate the price down or leave this opportunity behind.

Everyone has their own approach to negotiation. You can choose to be uncompromising, but the other party is likely to respond in a similar way. The best negotiations are about compromise. As the buyer, realize that you will not get everything you want and the seller will hopefully do the same. The seller knows you can walk away from the deal, but you must also realize that they want to earn a return on their investment—both parties are negotiating for the same thing.

Signing the Deal

After the buyer and seller have agreed on all the terms, the legal documentation must be signed. Make sure you have an attorney review the documents before signing. This should be done before negotiation, if you want, you may need to renegotiate legal terminology. Remember, it isn’t just the buyer and the seller in the transaction: the franchisor will be there also. They will need to agree to the Sale and Purchase Agreement, too.

Are there turnaround opportunities for franchise resales?

In all industries there are turnaround opportunities. Franchising is no different. Taking a franchise location that isn’t profitable, putting time and effort into it and flipping it for a profit can be a great investment. In any market, these opportunities will be open to willing, entrepreneurial individuals. 

The key is finding a business whose owner no longer sees a path to profitability. When an owner doesn’t see the opportunity to make money, they will likely willingly sell to cover their downside. Because on businessperson is failing does not mean you will fail!

Most of these owners will be burnt out from plugging holes and bailing water. The grind is too much for them. They are ready to exit. The may not want to face an uphill battle of investing capital and time into improving their location. Some may just be coming to the realization they do not excel at business ownership. This realization could take months, but often it takes years.

As the buyer, you have a huge advantage in this situation. The owners are ready to sell and you are ready to purchase, invest, and return the location to its former, or new-found glory.

Part of your due diligence will consist of researching why the business was failing and basing a fair price off of that information. Franchising takes commitment to the processes and systems the franchisor has in place. 

franchise resale growth

A good number of failing franchisees falter when they don’t follow the set plan. Some people don’t have the requisite discipline and commitment to be a franchisee. They may also find that they are not suited to the specific franchise industry. Either of these two situations are easy ways for a franchisee to fail.

To be clear and not sugar-coat the situation, purchasing this kind of resale is very different from purchasing a successful location. You need to be ready and willing to roll-up your sleeves and put in the work to turn around this kind of location. This is not a model for a semi-absentee owner—the only way to do this is full-time and be all in.

This is a great way to purchase a franchise location with a location and built structure instead of building a location from scratch, but you will also face the battle of the turnaround. If you like a challenge, this is definitely an avenue to consider.

How can a failing franchise location turn a profit?

Not all franchise resales will be for units that are producing profit hand-over-fist. There are many opportunities for an enterprising buyer to purchase a failing franchise location and put in the effort to make it a cash cow. This option is not for every buyer, but should be a consideration for those willing to put in the elbow grease. 

The one major advantage to this situation will be the purchase price. Because the unit is underperforming, the asking amount should be smaller than for a successful resale location.

Most failing franchise locations are the fault of the franchisee, not the franchisor. During your investigation, you should find out how other locations are faring in similar outlets. If the unit for sale is the anomaly, instead of the standard, then you have an opportunity.

Franchises are less likely to fail than a small business. The rate of failure for all businesses is high, but one study found 85% of franchises make it to year five. Sole proprietorships don’t fare as well. Fundera states:

20% of small businesses fail in their first year, 30% of small business fail in their second year, and 50% of small businesses fail after five years in business. Finally, 70% of small business owners fail in their 10th year in business.

The major difference between the two is likely the key to success: franchisor support. It is in the best interest of the franchisor to help you turn around your newly acquired unit because it increases their margins also. 

At HIRE YOURSELF we like to think of franchising as entrepreneur lite, and a franchise resale is a perfect opportunity for someone to swoop in and display their entrepreneurship skills. Those who have the drive and determination to make a unit a success will have a greater chance of tuning around a floundering franchise unit.

franchise resale profitThe major advantages of any resale remain with a unit in need of a turn-around. You will have the location ready, it will be staffed, it will be stock, and while there may not be a huge customer base, there will be one. With infrastructure, employees, vendors, and revenue streams in place, you will can jump in and flex your management muscles.

With any purchase, before you go all in on a troubled unit, complete your due diligence. Make sure to consult your attorney, accountant, and other professionals. They will have a lot of questions because at face value, purchasing a failing property doesn’t make a lot of sense.

Some questions you should consider are:

  • What is the territory? A reason this unit could be failing is market saturation. Another unit just down the road or a few blocks away could be creating inter-brand competition.
  • Are there other similar stores nearby? Companies outside of your business model may setup near other locations and eat away at the margins. 
  • Are there enough customers nearby? You need to have a local customer base to support operations. A population that is too small or disinterested in the product or service being offered will not support a unit no matter how well it is run.
  • Are the franchisors demanding too much? A franchisor that sets a royalty fee too high or makes other hard to meet demands from a franchisee may be causing undue pain, resulting in failure.
  • Is the location too old looking? The location may have been around for many years and need many upgrades. No one wants to visit a run-down location to purchase something. While this may be the ultimate problem with the unit, it may cost upgrades and repairs beyond the valuation.

 

No business closes due to too much liquid capital. Most of the time, failing units close or sell due to cash flow issues. Your due diligence should focus on this. Discover if the sellers were having cash flow issues and why. Did they try to get financing? What processes were they using for cash management? Were inventory controls in place? How many return customers are there? Was a service business relying on one or two major clients who simultaneously left? And with most franchise issues, a good place to start it to find out if the franchisors systems and processes were being used and followed.

As the buyer, you need to drill down and discover whether the issues were internal, external, or a mix of both. This will help lead you to the best decision and provide a path forward post-purchase.

What is the territory and location for a franchise resale?

When you purchase a resale, there will be a territory that comes with it. This is a key point in the purchase. Your territory can be a major factor in defining your success or failure. When working within a resale, or transfer, you should make sure to investigate the territory fully. Beyond the territory, there is the lease agreement.

A franchise territory is the area your business is allowed to operate within the franchise. This means the franchisor will not sell any locations in that defined areas. Most often it is based on zip codes. You will be the only location in that area and therefore your job is to get all the customers in that location you possibly can. The franchisor will provide all of this information and explain it thoroughly. Make sure you understand this portion of the agreement with the franchisor!

There are a ton of technology service you can use to investigate your territory. Even a simple census search can reveal some important information about your demographics. Can the people in your areas afford the services you provide—or is their demographic even interested in your service or product?

You should also explore the costs of the current building the unit is located. There will sometimes be costs beyond rent, including maintenance and cleaning. There are other factors like insurance and real estate tax you should investigate.

An area many people skip is zoning. These laws can change based on the whims of a local zoning commission and city council. Just because a building is currently zoned one way does not mean that it will remain that way if the owner changes hands. There may also be grandfathered structural deficiencies that will need to be upgraded when a new owner assumes control

Are there special considerations with a franchise resale?

Franchise resales are a different animal that starting a franchise from the ground-up. There are slightly different considerations for a potential buyer. Many have already been outlined above. As has been mentioned, there will be staff in place. You will need to review them, instead of hiring new staff. There will already be inventory. You will need to check it completely. The location will already have a customer-base. You will need to continue to build those relationships.

To review a few key considerations:

  • Your liquid capital. Do you have enough capital to reasonably complete this investment. Your franchise consultant will help guide you through this. But if you don’t have the capital to cover the costs of running the business for a short term post-sale, there will be issues.
  • Business acumen. You are not required to be a sales person or an analyst to run a business, but you do need to bring something to the table. It could be your willingness to dive in and make things work, but if your goal is to buy something and walk away while it makes money, a resale is not a great choice.
  • Use professionals to evaluate the unit and the sale. You should have an accountant and a lawyer review all documents and figures. They understand their sides of the business and will be equipped to provide you the best advice—or caution.
  • Research the franchise. As part of your due diligence, you need to make sure you understand the franchise concept you are buying into. You may think you want to own a burger joint, but when you realize the franchisor requirements, you may have second thoughts.
  • Discover why the location is for sale. You will get an answer from the seller when you ask, but you may need to dig deeper if they answer doesn’t seem satisfactory. They may say they are burned out and are struggling to turn a profit, but the real reason could be that the demographics of the area don’t support the product or service being sold.
  • Ask about any liabilities you have after the current owner leaves. You are buying the entirety of the business, including any outstanding debt or lines of credit. You will want know about these and the expectations for repayment. You will also have employee liabilities, including outstanding worker’s comp payments and lawsuits.
  • Knowing the sales structure will help you understand how the transfer will occur. The two common types of transfer are asset sale and share sale. They are different and have different implications for the buyer.

Do franchise resale models allow me to be a semi-absentee owner?

As with all franchises, some allow a semi-absentee owner structure and others do not. This is based on the franchisor requirements and, often, your goals. Being a semi-absentee owner may seem viable, but it means you will have to work an additional twenty to thirty hours a week to maintain your franchise. If your current job does not allow for flexibility, you may have a hard time managing your current career and your new investment successfully.

Opting for a semi-absentee model means you will need to secure a great manager for your unit. Without an on-site manager to handle issues and general business day-to-day, you will struggle. You should consider your communication and management skills working with this employee. Being unable to effectively motivate and manage your manager means more work for you to maintain a healthy business. 

You will also need to pay this general manager a salary worthy of their skills. You will want to hire the best person you can find. Remember, this is the person you are trusting to grow your investment. You may not have the capital to pay someone a salary commensurate with the requirements of the job, in which case, semi-absentee ownership will not work for you.

Your franchisor will often have a clause in their contract defining their view on semi-absentee ownership. It has been suggested that up to 25% of franchisors do not allow semi-absentee ownership. This means when reviewing a resale, you need to look into the franchisors requirements. Nothing could be worse than falling in love with a resale, and later finding out they do not allow the structure you were hoping for!

Most semi-absentee owners find themselves working in models like fitness, hair salons, tanning and car washes. These franchises are less hands-on than others. Franchises that require special licenses or education levels are less likely to be semi-absentee ready and will need to be owner-operator.

Being a semi-absentee owner may sound great to you now because of the security of keeping your income, but there are certain personality types that may not mix well. As a semi-absentee owner you need to be to not micromanage and have to be willing to let others influence the business. Since you are not on-site all the time, you will have to relinquish some control. If this is not your personality, this model is not for you.

You will have to be involved and performing reviews of personnel and the overall business is important. It is your investment! But as a semi-absentee owner you will focus more on the big picture. Are the employees hitting sales targets? How does the P & L look? What marketing strategies are you pursuing? Are the procedures being followed? Are you compliant with local laws? A wise franchisee would setup a structure to quickly discover all the information he or she needs.

Considering the previous operating history of the location is important. If the previous owner worked as the owner-operator of the unit, then they may not have a strong management team in place. This can make for a bumpy road after purchase. You may find yourself hiring, training, and installing a management team shortly after purchase. This will take more time and raise the total investment cost. 

The other option is to actively search for franchise resales that currently have semi-absentee owners. They should have a strong management structure in place and you can continue to use their team post-purchase.

For more on semi-absentee ownership, read out article our article Start Small or Go Big: 4 Models for Owning a Franchise.

How do I find the best franchise resale for me?

Finding the best franchise for anyone is a multi-part process. There are three ways you can go about picking a franchise. 

  • Internet search: This is the least effective way to find the best franchise. You will only find what is easily available through a search and you can likely only find franchises you already know. With so many concepts out there, you maybe missing a franchise that would really work well for you.
  • Franchise inquiry website: These websites generate leads for franchise companies. They often have you take a quiz that “matches” you to a list of franchises and then you can contact the franchisor to take the next steps. These are slightly better than an internet search because it will introduce you to multiple franchises and models/concepts you have never heard of.
  • Franchisor websites: Every franchisor has their own website that will offer to have them contact you and discuss becoming a franchisee. The issue with this route is that the franchisor is going to try really hard to sell you on their concept only. It is not an unbiased opinion! Of course you would be a great candidate for their franchise when you talk to their salesperson.
  • Franchise consultants: This is the best option (and not just because we are franchise consultants). A consultant is an impartial third-party in your process. Plus, they have knowledge of many franchises and know how each operator works. They will take the time to get to know you and guide you through the process, introducing you to people along the steps towards owning your income. It’s like having a free business coach for a few months.

 

When it comes down to it, the best franchise resale is the one that suits you the best. Just because someone else succeeds at waste removal, doesn’t mean you will. And a big name franchise is worth considering, but you shouldn’t think it is the only option. Your success is based on your ability to follow the proven system and plans; your happiness is based on the match to the best fitting franchisor and concept.

Franchisors spend time and money recruiting only the best matches for their locations because they know that the fit is truly important. Their reputation is on the line. A franchisee who fails can leave a toxic feeling for customers and locales. 

Working with a HIRE YOURSELF franchise consultant will make your franchise candidacy easier. There are so many questions that you should be asking yourself about what you want to do as a business owner. A consultant will ask them, listen, formulate some ideas about franchises that would work for you, and then present you with a list of possible options. If you don’t like any of them, they will go back to the drawing board. The process is all about finding what is best for you.

At HIRE YOURSELF we have a proven process (like a franchise) that matches our candidates to franchises that work well for them. We rarely have potential candidates walk away from the choices they were presented. More often than not if they do, it is due to fear and anxiety. We are here to help with that, too!

Are franchise resales recession-proof businesses?

No business is recession-proof. Any business can fail during hard economic times. But, there are models and concepts that are recessions-resistant. This means they have a fighting chance of growing and surviving an economic downturn. 

This is a common question that franchise candidates ask and is an important one. This should be a consideration during your search and there are many things to consider when worried about a recession.

The most important factor might possibly be the industry that franchise concept works within. It may be counter-intuitive, but many beauty and luxury concepts do well during recessions. Are you going to give up your haircuts? Will people stop getting facials and pedicures? Usually, these practices continue during recessions because when you are spending less on travel or eating out, they will do the cheaper things that make them feel good.

Another area that usually holds up well is the service industry. If you are working full time and need care for your aging parent, you will still require a caregiver from the local senior care franchise. You will probably also still send your child to the local daycare franchise.

Uniqueness will also contribute to success during a recession. If you are the only operator offering a product or service in your area, customers will need to come to you. Many fast food restaurants close during a recession because of market saturation—there are too many options eating away at a smaller consumer-base.

Your HIRE YOURSELF consultant can help you navigate all the different industries and concepts out there to define what may and may not do well in a recession. They can also lend you their experience within the industry and based on their observations from the last recession to give you a leg up in the search.

What experience do I need to purchase a franchise resale?

None. There is no required experience to become a franchisee. That being said, having certain experiences will make you a much better and more successful candidate. Every franchisor is looking for something different in a franchise candidate. Some are looking for certain business experience or licenses/certifications. Others base their selection on innate personality traits. Most will weigh characteristics and personality traits higher than experience. 

Just because you have years of sales experience does not mean you will make a good manager, but if you seem to have leadership qualities and a drive to learn and grow, you will likely be more successful. You can have no sales experience and still be a successful franchisee!

We like to think of the five C’s for what makes a great franchise candidate and, eventually, a fantastic franchisee. The C’s are: capital, capacity, cooperation, character, and customer satisfaction. Meeting these qualities can make or break a candidates success in the long-term.

Obviously all kinds of business acumen are important to a franchisee, but there is no single experience that will determine success or failure. As a business owner, you can’t purchase a resale and expect it to run itself. You need to bring something to the table (beyond your capital) whether it is your experience organizing and running a company as a Chief Operating Officer, your inquisitiveness to learn about new things, or your zeal to delight customers.