Franchise Q&A [Bio] Derrick Simpson is managing director of Franchise Resales Q [Bio] Natalia Lewis is an associate at Hamilton Pratt Q
How much disclosure regarding the
accounts of the business can I expect from the franchisor before I commit any money?
A. Whilst you should not assume that this would automatically be provided, you should ask the franchisor for copies of their latest audited accounts and, where available, management accounts. Some franchisors may be reluctant to provide this information and, should this be the case, you can and should obtain a copy of the latest audited accounts, which is publicly available information, from Companies House. Note, however, that if the franchisor is new, or operates through a new company, the accounts may not contain much useful information or give a true reflection of the financial position of the business. You can, however, expect to see information concerning the financial performance of the other franchisees. This may be in the form of average start-up costs, turnover and profit of the
network or it may be the figures of the top 10 franchisees. If it is not clear what the figures are based on, you should clarify this with the franchisor and insist that the information relates to all franchisees, or a good selection across the board, and not simply the top performing franchisees. n
The franchisor we are speaking with has offered
us the resale of an existing franchise as an option. Why would we want to buy a failed business – surely that is risky?
A. Franchise resales are usually not business failures. Most of the resales transactions with which I work are due to the current franchisees wishing to retire or move into another business sector rather than having to sell. Of course, from time to time there will be a business that gets into
financial difficulties or where the franchisee has personal issues that drive the sale, but even a business that is in these circumstances may not be a risky option for you. The strength of a franchise resale is that you know in advance what you are getting. The business has been trading so there is clear evidence of the sales pattern, the profitability of the business and the clients – all in place for you to take over and develop further. When this is balanced against the relatively unknown element of a new start franchise, where you are basing your decision and plans on projections or what others have done, most purchasers these days see the inherent strengths of a franchise resale.
In terms of cost, a franchise resale may cost more to acquire than the start-up cost for a new business but the ongoing working capital requirement is often much less. This is because the business is already cash generating so there is not so much financial support required whilst it grows. In many cases, the total cash outlay over the first few years for a resale is often the same as that for a new business. The UK franchise sector is starting to mature, so many long-established franchisees are looking to sell and retire.
In fact, the 2013 NatWest/bfa franchise survey shows that over 58 per cent of franchisors expect to offer franchise resales during the coming year. Banks considering funding applications are also supportive of franchise resales as they also can see tangible evidence of what can be done.
It is important when considering a franchise resale that you are provided with all the facts about the business, not just the financial accounts. You need to be informed about how the business has performed, the detail of the staff, equipment and any premises involved. This is usually provided in the form of a prospectus of sale or information memorandum. With these details to hand you can make informed decisions about whether to buy an existing business or opt for a new-start operation. It is also important to have the correct financial and legal advice during any franchise purchase so ensure the advisers you are working with are accredited by, and members of, the bfa. A well-planned franchise resale combined with a supportive and stable franchisor and an enthusiastic sales- oriented franchisee can mean the result is a true win-win situation.
July/August 2014 |
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