What to Consider When Buying an Existing FranchiseMay 23, 2018
If you’re thinking of buying a franchise remember, new isn’t always better.
Have you considered buying an existing franchise? The sale and purchase of an existing franchise is commonly called a franchise resale. This is becoming an increasingly popular choice for prospective franchisees in the UK. But is it right for you?
In this article, we help you decide. We explore the advantages of buying an existing franchise and the legalities you’ll encounter during the purchase process.
What is an Existing Franchise?
An existing franchise refers to a territory or unit that is already owned and operated by another franchisee. The franchisee can sell the territory, with the franchisor’s agreement, as part of a franchise resale. By contrast, a virgin territory (or greenfield) describes a brand new franchise site or location where the franchise hasn’t operated before.
There are pros and cons to both options, but if you’re new to franchising buying an existing business has advantages.
Why Buy an Existing Franchise?
1. Established Customer Base
An existing franchise comes with an established customer base. This gives you stability and cash flow from day one! If you purchase an existing business that’s already a hit with customers, you’ll increase your chance of success and profitability in the long run.
2. Experienced Team
When you buy an existing franchise you take on the current team as well. The employees’ terms and conditions are protected under UK employment laws, such as Transfer of Undertakings (TUPE). This means staff contracts are exchanged as part of the resale.
As the new owner, you get the established business and the team who made it a success! Their expertise will help retain customers and save on your training and recruitment costs.
3. Tried and Tested Marketing Strategies
Most franchisees receive marketing support from the franchisor. Yet, even with this support, establishing a customer base from scratch can be difficult. By contrast, an existing franchise comes with an established marketing strategy. For example, the business may already have successful social media accounts, glowing online reviews and an industry reputation that you can build on.
4. Lower Risk
The start-up costs needed to buy an existing franchise are higher than those for a virgin territory. However, the proven success and established infrastructure that comes with an existing franchise, means it’s a lower-risk investment. The bottom line? This low risk and high return potential appeals to banks, helping you secure the finance needed to run your business.
The Legalities of Buying an Existing Franchise
Feeling tempted? Buying an existing franchise (franchise resale) is an exciting, yet complex journey. So, here we explain some of the legalities to help you navigate the process:
1. Due Diligence
Due diligence describes the vital research stage of the purchase process. It’s especially important when buying an existing business. It’s up to you to adequately investigate the business you plan to buy. Fail to do so, and you could be lumbered with legal issues later. There are three key areas to consider – the franchisor, the current business, and the industry.
The below points are important areas of investigation, whether you’re buying a brand new or existing franchise business:
- What are the franchisor’s expectations of you? You will have an interview with the franchisor to discuss expectations and obligations. They must approve the sale. The interview is also your chance to gauge whether they are right for you.
- Does the franchisor have a strong track record? It’s worth comparing their best and worst performing franchises to gauge the franchisor’s success rate.
- What do other franchisees’ think of the franchisor? The franchisor should give you a full list of franchisees to contact. You could visit some of them to see how they run their business.
- Is the franchisor a member of the British Franchise Association (bfa)? The bfa sets the standard for franchising in the UK and is an indicator of quality. That said, the franchisor’s bfa membership shouldn’t substitute your own research.
- Is the franchise business profitable? Obtain information about current financial performance from the franchisee and franchisor. Publicly listed information may also be available.
- What do customers think? Read online customer reviews for an unbiased perspective. Is there an established customer base or heaps of complaints?
- What is the current business plan? Identify how the business operates now and any improvements you could make.
- Why is the seller selling? Ask lots of questions! Discuss the reasons with the franchisor and current franchisee.
- Is it a growth industry? However much you love the product or brand, be realistic about its long-term prospects. You could contact industry experts and trade associations to gain key commercial insights.
- Is it a saturated market? A product that’s popular with customers may mean stiff competition for you as a franchisee. Who are your competitors?
It’s important to seek legal advice at this early stage. Your lawyer will identify any legal issues or commercial threats you may miss.
2. Seller Warranties
Once you’ve found your dream franchise and done due diligence, the negotiations can begin. You have the right to ask the seller for warranties about the business. These warranties should confirm that the business has been properly run and managed. The associated document should also list any risks or issues currently affecting the business, such as debts, problems with the lease or open litigation cases. And of course, always get the agreed warranties in writing.
3. Share sale vs Asset Sale
These terms describe the two different types of sale available. The type of sale affects many aspects of the purchase process and beyond, such as which warranties you’re entitled to and how tax liabilities are handled. So make sure you understand what you’re getting into.
Share sale – The entire business, including all associated assets and liabilities are exchanged as part of the sale. In many ways, this is often the simpler of the two types of sale; you take on the business in its entirety.
Asset sale (or asset purchase) – All three parties (seller, buyer, and the franchisor) agree on which assets and liabilities are exchanged in the sale. There will be tangible and intangible assets to decide on such as the company equipment, property leases, and supplier contracts. This is a more customised sale – you pick and choose which parts of the business you acquire.
Be aware that you won’t always have a great deal of choice over the type of sale.
4. Sale & Purchase Agreement
This is the legally-binding document between the seller, buyer and, franchisor. Once signed, it obligates the buyer and seller to complete the sale and purchase of the franchise. Of course, the exact details will depend on the type of sale (share or asset purchase). Typically, this contract documents everything the parties have agreed on, including which assets are being exchanged. So take legal advice and make sure you’re happy before signing on the dotted line!
5. Franchise Agreement
Whether you’re buying a brand new or existing franchise, the franchise agreement is essential to your business success. This is the legal contract between you and the franchisor. Key features include:
- Obligations the franchisor and franchisee have towards each other. As the buyer, it’s vital to establish what support and services you’ll receive from the franchisor. The terms of the franchise agreement aren’t negotiable but it’s important you understand what you’re signing up to.
- Conditions allowing for the termination of the contract. This could include everything from how often the franchisor reviews your business plan to the resale profits the franchisor is entitled to if you sell. So it’s important to be familiar with every detail.
Always get the franchise agreement reviewed by a specialist franchise lawyer. This is essential because the terms of this agreement play a big role in your business’ success.
A franchise lawyer can help you navigate the purchase process from day one, through to completion and beyond!
Get in in touch with us at Goldstein Legal, for a free initial consultation.