Franchise advice
The pre-loved franchise
Charlie Dickson of Ashtons Franchise Consulting on what to consider if you’re looking into a franchise resale
I
nvesting in a franchise resale can have a number of advantages over starting a new franchise as a startup business. A
franchise resale represents an opportunity to invest in not only a proven concept, but a proven up-and-running business with an established customer base that still benefits from the training and ongoing support of the franchisor. Franchise opportunities being offered
for resale usually fall into two categories: those that are performing well and are profitable, and those that have not been as successful for their current franchisee. Both can potentially represent a good opportunity; however, the risk associated with the second may be greater. When considering purchasing a
franchise resale opportunity, you must identify and fully understand which category the franchise you are considering falls into.
In order to do this, you need to obtain
answers to specific questions, including: • Why is the business being sold? • How has the franchise performed over the past two to three years?
• What is the status of the employees of the franchise?
• If the franchise is dependent on its site location for success, what is the status of the real estate?
• Is there anything that has not yet been disclosed to you that might hinder the business?
When undertaking your research, you will need to talk to both the seller and franchisor to gather further information as part of your due diligence. In addition, you must also meet the franchisor and conduct a complete investigation of the franchise just as if you were going to launch a new franchise territory.
Weighing up the options It is important to ask the franchisor to confirm the information that you have received from the seller. The franchisor would by no means wish for you to invest in their franchise under false pretences. It is worth noting that, as standard practice, franchisors will undertake their own recruitment and franchisee selection process regarding applications to purchase franchise territories, including resales. Assuming the business is currently
successful, the valuation should be relatively straightforward, as you will have existing trading and earnings figures to refer to. The best method is a multiple of the net cashflow you will receive from the business. Some franchisees run expenses through their business that you may not require to operate your business, such as company cars or specific business loans. Consider the salary costs associated with the current owner. Take the net income of the business and add back any unnecessary expenses to determine the true net cashflow.
Calculating costs The price of this type of successful business should be between two and five times its net cashflow number: the more stable and dependable the net cashflow, the higher the multiple that you can reasonably expect to pay for the franchise. The multiple may also be higher when the trends and forecasts of the business growth are positive rather than flat or negative. With the second type of resale, when the business is not currently performing as well, it is more difficult to
calculate a purchase price. The existing owner will always have many good arguments about why the business is not performing as well as it should, but ultimately it comes down to whether you are convinced that a simple change in ownership can rectify the problems and give you a real opportunity to build a profitable business. The only time this is true is when the existing owner is not operating their franchise territory according to the model designed by the franchisor. If you have confirmed that most or all other franchisees following this particular model are performing well and are profitable, and you have determined there are no other problems related l
Charlie Dickson is a franchise consultant at Ashtons Franchise Consulting. He offers advice and guidance on franchise sales and resales from the initial enquiry.
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