Franchise Advice
Is a pre-owned franchise right for you?
Jane Masih, head of franchising at Owen White Solicitors, discusses the pros and cons of buying a resale franchise business
T
he opportunity to acquire an existing franchise business as a resale is an attractive prospect for many reasons. Acquiring a franchise as a going
concern through the acquisition of assets, or buying the shares in the franchise trading company, gives the prospective franchisee the possibility of acquiring a business which is up and running with a proven trading history. A benefi t of a resale provides a prospective franchisee with the opportunity to acquire a business with premises, employees and a customer base already in place. Resales also provide the franchisor with the opportunity to introduce new franchisees into the network and kickstart franchise territories that could benefi t from the enthusiasm of new owners.
One of the disadvantages of a buying
a resale franchise is it is likely to be more expensive than the initial outlay for a startup franchise for the same brand. This is because the prospective franchisee will be asked to pay for the goodwill or going concern value of the existing business in addition to the value of the assets, such as equipment, vehicles, and other fi xtures and fi ttings required for the operation of the franchise business. The valuation of a resale needs to be considered very carefully to ensure that the prospective franchisee is not paying more than is sensible and justifi ed for the business. Equipment and other fi xtures and fi ttings will be secondhand, and thought must be given to realistic valuations and when the business will have to replace or upgrade the assets used in the franchise business because of changes to the system and to comply with the franchisor’s requirements.
A resale will also require more fi nancial and legal due diligence compared with a startup franchise, but these additional costs should be balanced by the opportunity to buy a business producing revenue from day one. As franchise resales become more common in their networks, many franchisors take more of an active role in the sale process, which requires both outgoing and incoming franchisees to enter into a tripartite agreement. This enables the franchisor to be a party to the sale agreement and ensure that the terms of the franchise agreement on a
“Buying a pre-owned franchise can be a complicated process”
sale of the franchise are observed. The franchise agreement will generally require the franchisor to consent to a sale of the franchise business and to approve the proposed purchaser as a suitable franchisee. Requiring the parties to enter into a resale agreement that is conditional upon the franchisor’s consent, gives the franchisor the ability to ensure that all monies are collected from the outgoing franchisee. This also ensures the purchaser enters into the franchisor’s then-current franchise agreement and undergoes training in the manner required by the franchisor.
It is quite common for the franchisor to instruct its solicitors to issue the resale agreement and require both the
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franchisees to pay 50 per cent of the franchisor’s legal costs. The franchisor’s solicitors will have drafted an appropriate resale agreement to reduce legal costs for both the franchisees. The legal costs for the outgoing and incoming franchisees are often limited to reviewing the agreement and ensuring that it refl ects the commercial terms of the resale. Where the franchise business operates from leasehold premises and there is a transfer of the assets, a separate assignment of premises will also be required. On a share sale the purchaser will acquire the
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