We discussed What to Look for When Buying an Existing Franchise with Richard Parker the founder and President of Diomo - The Business Buyer Resource Center.
Richard points out 3 really great questions that can actually can also be used if you are buying a new franchise and discussing the success of the franchise with the current franchisees:
Great idea! The past and current franchisees can provide relevant information to the potential franchise buyer as they are the ones who have already experienced how the business performs and how the franchisor delivers support and assistance to the franchisees. In my franchise guide, I have discussed these important points to be aware of in buying franchises.
Be very careful when purchasing an existing franchise. Most, if not all existing franchises for sale are either company owned locations or are owned by now desperate franchisees. I have looked and looked at hundreds of franchises for sale and they always fall into the two categories above. Usually franchisers are the only authorized supplier of product to the franchisee. They automatically increase their margin when they take over the location. They then attempt to re-sell or re-franchise. You need to look at the books of the franchisee, not the franchiser. You need to determine if getting a particular franchise is a deal or not because you reduced your initial investment. The only other alternative is to do the opposite and pay par value or a premium based on the books. Just because an existing franchise is for sale does not mean it should be purchased. In fact, more often than not you will find only poor performing franchises for sale, in bad locations and bad business environments. There are a few exceptions, but any decent franchise would be scooped up by a “fellow franchisee” way before anyone from outside the “system” would see it. Buying an established good franchise at a fair price (say less than two times EBITDA) is a myth.