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Franchise Advice O


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 under that franchise or to buy a business from an existing franchisee. In any given franchise network that has been established for a few years (usually five years or more), there will usually be some franchisees that are looking to leave the network.


A number of factors need to be considered before arriving at a decision. The first 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 profits it generates are below their expectations, others may find 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 whom 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 willingly 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. This means that they must investigate fully the business they intend to buy in the same way as they would if they were buying a non-franchised business. The books will have to be examined closely and searching questions will need 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 himself 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 to them 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 a good title to all the assets free from all borrowings and mortgages, etc. None of these things feature if the buyer were to


take a new franchise because it would effectively be a new business startup. 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 ready income from day one, so can estimate


for themselves the potential of that business and how they can grow it in the future. With a new business startup, there will be nothing in the till on day one and they will have to build up their customer base and business from scratch. Any business plans and profit 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 the buyer in this respect will be based on the franchisor’s experience, which more than likely will be in a different area or location. For example, if the franchisor is based in the South East, any projections it offers a prospective franchisee for the new area in the North East are bound to be of less value than a business plan and financial 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, you should remember that past performance is no guarantee to your 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 business is worth. 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 profit did they make?” are not uncommon. As always, it boils down to the franchise agreement, something that should be thoroughly investigated at the outset. n


Manzoor Ishani Senior consultant solicitor Sherrards Solicitors


Manzoor has specialised in franchising for more than 40 years and is a former member of the Legal Committee of the British Franchise Association. He is is co-author of 'Franchising in the UK', 'Franchising in Europe' and 'Franchising in Canada', and he has also helped UK companies franchise into more than 35 countries.


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