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Franchise Advice

Manzoor Ishani, senior consultant solicitor with Sherrards (solicitors), discusses what to look for when buying a pre-owned franchise


ne of the advantages of buying a franchise in a mature network is that the prospective franchisee may have a choice of whether to open a new business as

a franchise or to buy a business from an existing franchisee. In any given franchise network that has been established for a few years (usually fi ve years or more), there will often be some franchisees that are looking to leave the network. Research indicates that 40 per cent of all franchisees bought their franchise from an existing franchisee.

A number of factors need to be considered before arriving at a decision. The fi rst question to ask is: why does the particular existing franchisee want to leave the network? Franchisees leave for a variety of reasons – some wish to retire, some may feel that the business or the profi ts it generates are below their expectations, others may fi nd that they have taken their business to a certain level and are not willing to commit the resources required to take it to the next stage, or some may feel that the business is less satisfying or more demanding than they had anticipated.

It is important to try and get to the real

reason behind the sale. This is not as simple as it sounds because when asked, a franchisee who is looking for a buyer may be disinclined to tell his or her prospective buyer the full story for any number of reasons. For example, the business may be largely dependent on a very small number of valued customers, one or more of which may have already indicated to the franchisee that they are going to withdraw their business. This is not something that a prospective seller will necessarily be willing to reveal to a buyer. In some circumstances, a prospective buyer should ignore the fact that it is a franchise and proceed on the basis that they are buying a business as a going concern, which is what they are really doing. This means that they must fully investigate the business they intend to buy in the same way that they would if they were buying a non-franchised business. The books will have to be examined closely and searching questions will need

None of these things feature if the buyer

were to take a new franchise because it would eff ectively be a new business start-up. The advantage to a buyer of an existing franchised business (assuming that it receives a clean bill of health) would be that they own a business as a going concern with a customer base and a fi xed income from day one, so can estimate the potential of that business and how he can grow it in the future. With a new business start-up, there will be nothing in the till on day one and they will have to build up a customer base and business from scratch. Any business plans and profi t projections will be based on the franchisor’s assessment of what the new business will be capable of achieving. Any advice that the franchisor gives in this respect will be based on the franchisor’s experience, which more than likely will be in a diff erent area or location.

For example, if the franchisor is based June 2016 | | 65

to be asked, and they will have to press for answers where they think that the seller is being evasive. Remember that in buying a business as a going concern the buyer will take over liability for employing all the staff including their employment history. The prospective buyer will also need to satisfy themselves that customer records are accurate, what the position is with regard to customer contracts and other obligations they will be taking on once they take over the business. In addition to this, the buyer will also need to protect themselves against liabilities of the business and ensure that the seller accounts for any money paid on account of contracts yet to be performed, such as part-payments and deposits. Furthermore, they will need to take care to ensure that they take good title to all the assets free from all borrowings, mortgages etc.

“The buyer will need to protect themselves against liabilities of the business.”

in the South East, any projections it off ers a prospective franchisee for the new area in the North East are bound to be of less value than a business plan and fi nancial projections based on a business that has already existed and traded there for a few years. When it comes to producing business plans and projections there is no substitute for real experience; and in any case, remember that past performance is no guarantee to future performance. On the other hand, a new franchise will cost less than the purchase of an existing franchised business because the buyer will have to pay extra for whatever the existing franchisee’s business is worth. Whether or not the franchisor gives his or her blessing to the proposed sale will depend on the circumstances. If the selling franchisee has been running a sub- standard operation, or is failing to grow the business, or has lost interest in it, the franchisor will be keen to see that business change hands. On the other hand, there may be circumstances where the franchisor may have a confl ict of interest because, by sanctioning the sale of an existing franchised business to a prospective new franchisee, the franchisor will lose a sale of a new franchise, which would add another outlet to the network. This is because franchisors grow their businesses by selling franchises – there is little for them to gain in having a high turnover of existing franchised outlets. Having said that, there is an important factor for the franchisor to consider. A successful franchisor needs to demonstrate to a prospective franchisee that its franchised business will be worth something at the end of the day and that the franchisee will be able to sell his business and realise a fi nancial gain. This is best answered by a franchisor being able to demonstrate that former franchisees have been able to sell their franchised businesses and at a good price. The questions asked by prospective franchisees “can I sell my business?” and “when did one of your franchisees last sell his or her business and what profi t did they make?” are not uncommon. It boils down to the franchise agreement, something that should be investigated at the outset.

Manzoor Ishani Manzoor Ishani is a senior consultant

solicitor with Sherrards (solicitors), a commercial practice advising franchisors and franchisees in the UK and internationally.

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