When buying a franchise resale, your investigation, review and analysis, must take place on two fronts. You will have to investigate the individual business, and also the master franchisor. Here is what to look for when buying a franchise resale:
The Franchisee
In addition to completely analyzing the prior year's financials, you will want to gain a very clear understanding of the franchisee's satisfaction level with the franchise. Obviously, the seller will tell you "everything is great", so you have to get unbiased advice. To do so, speak to, and meet with other franchisees in the system. The three most important questions to ask them are:- If you had to do it over again, would you buy the franchise again and why?
- If you were me, what would you look for specifically when analyzing the business?
- Do you believe the franchisor has delivered the level of support they promised when you signed up for this franchise?
- How does the franchisee rank within the franchise system for sales, profit, and all other key ratios?
- Are you obligated to participate in all company promotions?
- Search online and access the franchisee's blog or bulletin board. You will read the real-world of franchisee complaints (and there will probably be a ton of them).
- Can you test any marketing initiatives on your own?
- Is your territory protected and for how long and what area?
- Are you required to meet certain annual sales figures and what happens if you don't?
- Are there any family members working in the business? If so, how much are they paid (usually below market)? What additional expenses will you now incur to replace them?
- What is the failure rate in the system?
The Franchisor
- What training will they provide before and after you buy the franchise?
- Is the current franchise agreement transferrable? If so, will there be a transfer fee? There almost always is, and if you're smart, you can negotiate for the seller to pay all or part of the cost.
- Are they willing to finance the purchase?
- If you have to sign a new contract, you need to carefully analyze any issues that could impact your sales and/or profitability. If for example the royalty rate and marketing fund has increased, then you will make less profit. You have to then adjust the numbers the seller has given you to accommodates these ratios.
- Find out which are the best franchises in the system and call/visit with the owners. Ask them what they do best, the advice they would give you, and discuss the store you are considering but never disclose which one it is.
