Buying a resale or starting from scratch?
Every prospective franchisee will have their own list of needs and priorities. For some, location may be the one aspect they are not prepared to compromise on, for others it may be the timescale, or the financial investment required. Whatever your list of needs and priorities looks like, make sure that you share this with your franchisor! Here, Natalia Shvarts looks at 5 of the most common needs and priorities of franchisees and offers insight into the top things to consider.
How important is location to you? Are you prepared to relocate? How far are you prepared to commute? Does this fit in with the particular franchise sector you have chosen?
Knowing the local area gives you a clear advantage. If you are already established in the area or know the area well you are more likely to have a wider network of people that you may know, you are more likely to know where to network and where your target customers or employees are located, where the local hubs are and if you are a premises-based franchise such knowledge may be particularly useful.
The more established the brand the less choice you will have when it comes to immediately available territories. If that is the case, it will be particularly important to ensure that the franchisor is aware of your preference for location but also that you keep the franchisor updated in case your circumstances change. The franchisor will be one of the first to know if one of their franchisees decides to sell, but not all resales are the same and you never know how the opportunity may arise. Some franchisors may have franchisees who are not actively looking to sell but would consider selling if the right offer was on the table!
Are you looking to invest immediately or the next 12 months or are you flexible? Regardless of the sector and the brand, when you buy a franchise, you will need to complete an initial training course. Most franchisors have set times when they run such training courses, but some may be more flexible than others. Regardless of whether you are buying a cold start or an existing franchised business, you will need to take the franchisor’s training schedule into account, but this is particularly important to consider in a resale situation. The reason for this is that in a resale situation, from the franchisor’s point of view, the franchisor cannot allow you to join the training until the sale contracts have been exchanged, i.e. all parties are legally bound to proceed because if the deal should not proceed for whatever reason the franchisor is then left with a prospect who has been trained and given access to franchisor’s confidential information but who cannot proceed. Getting to exchange however takes the most time and the timing of the exchange will often be governed by whether or not the finance is available and whether the necessary due diligence and commercial negotiations have been completed. In my experience however, if there is a delay it is usually down to the finance not being available although if you are a cash buyer then this may not be as much of an issue. Whatever the scenario, you must allow plenty of time for getting the financials, the due diligence and legal process to be sorted and therefore plenty of time to get to exchange before you can start factoring in training and therefore completion, handover and start of trading.
When considering timescales, you need to consider not only your time, the franchisor’s and the bank’s, but if you are looking at purchasing an existing business you will also need to consider the seller, your solicitor, their solicitor, your accountant, their accountant, if there is a property involved then potentially the landlord and any other third party who may be involved.
Investing in a franchise is a big step and you will need to do plenty of research about the opportunity and making sure that you have chosen the right franchise for you. When buying a resale, there will be additional due diligence that you will need to do including financial, legal and operational due diligence. You will therefore need to allow for time, resource and the cost of such due diligence.
Taking on an existing business is challenging and it is important to assess whether you have the relevant skills and if not, how you will address the skill gap. Starting from scratch allows you to learn the business as you go along, recruit your own team and grown together. In a resale, you are walking into a business you are nor familiar with, in an industry you may be not familiar with and an existing team with whom you have no history. From the day of the handover, you will need to deal with the day to day whilst you are still learning the business and getting to know the team – this requires some serious people and management skills. A lot will depend on the business of course – how big it is, how complex it is, how capable the team is and whether the business is doing well. The team may well be able to manage the day to day quite well and will be looking to you for leadership and direction for the future, but this is why it is essential to know and understand exactly what you are buying. Often the first time you’ll meet your new team is on the day the purchase completes so whilst you may know the facts and figures, you may not necessarily know the personalities or the culture.
Make sure that you have a good support network that you can lean on especially in those early days!
Last but not least – the money. Although on average buying a resale is likely to be more expensive this is not always the case, and it is important to consider the exact breakdown of what the costs and expenses look like.
When buying a franchise, you will have the initial fee payable to the franchisor, you may have some legal costs, but these are likely to be relatively low and the same with accounting/finance. If the franchise requires premises, there will be costs associated with finding the premises and obtaining the lease. You will need to consider working capital, any investment in hardware/software, marketing and any ongoing costs payable to the franchisor, costs of any additional licences or permits if appropriate, recruitment and training costs, what your minimum requirements are in terms of money you may need to take out of the business and finally, how long will it take to reach the breakeven point.
With a resale, although there will still be the fees payable to the franchisor, they may be lower, so it is worth looking at how these compare. This should of course be balanced against your legal and accounting fees which are likely to be higher and you may be expected to contribute towards the franchisor’s legal costs (something that you may not have to do in a non-resale situation). On the other hand, if the business you are buying is already breaking even then this may mean that you need less in terms of working capital or additional investment. Even if the business is not breaking even, if the business is generating some income, then it might put you in a better position that starting from scratch.
In summary, the devil is certainly in the detail so if you are open to possibilities make sure you are comparing “apples with apples” as they say!
By Natalia Shvarts