In business seminars, a question that gets asked often is “how do I buy an existing franchise?”
The franchise industry is a crucial component of the US economy. According to Statista, there were 773,603 franchise establishments in the USA in 2019, which contributed to $787.5 billion in revenue (probably higher) and 8.43 million jobs.
Many people consider buying franchises because it is a turnkey business and can be financially rewarding. But are they worth the risks?
The frequently asked questions in buying an existing franchise include the following:
- Is it advisable to buy an existing franchise?
- What are the things to look for in buying one?
- How do you value an existing franchise?
- How do you find the correct one for you?
- Is buying an existing franchise less risky than building a franchise
Read on for the answers to these questions. Hopefully, the solutions help you decide if buying an existing franchise is beneficial for you.
Pros and Cons of Buying an Existing Franchise
Some of the benefits of buying an existing franchise include:
- Brand Identify
- Loyal Customers
- Trained Staff
- Existing Data
In buying an existing franchise, the previous owners and franchisor themselves would set the brand identity, customer base, and staff. There would also be available data on historical sales, which will help you create a marketing plan around the months with low sales.
However, an existing franchise might be selling its business because it isn’t profitable. If this is the case, you might have to make adjustments to marketing efforts, staff training, cash management, or just look at not buying the franchise due to other economic factors (say, a superior name brand on the same road as you).
What to Look For in an Existing Franchise
Looking for a franchise is more than just looking for a famous company to work with. Read on for some of the other factors you should consider in buying an existing franchise.
A Brand You Trust
Searching for a franchise is similar to looking for an employer – you should only work with a brand you trust. Choose a brand that you will enjoy being a part of because your franchisors will be present in every decision. You must also believe in the brand. Don’t simply invest in a brand because it is a concept you have hear of before – be passionate about this, you’re putting a lot of money into it!
Before buying an existing franchise, think of your target/total addressable market. The business should be about what your customers want. If the franchise is not something that matches your target market’s needs and wants, it either may not be worth investing in or to build more product and/or brand awareness in the area.
Perform a financial analysis to determine if you are projected to meet your acceptable levels of return or not. An existing franchise’s financial performance will be easier to gauge since you will already have access to their records, allowing you to immediately pinpoint wins and losses.
Applicable Business Model
One of the best parts about buying an existing franchise is that you’ll have a team that will guide you through a tried-and-tested business model. In case the franchise you’re interested in is not profitable at the time of sale, contact the franchisor and ask about the reason for the losses. The franchise owner might not be following the franchisor’s best practices. If this is the case, you might be able to turn a franchise into a profitable one with a few simple changes.
Conduct Due Diligence
Conducting due diligence means evaluating the existing franchise by getting information about its essential aspects, such as income statements, margins per product, inventory levels, labor costs, staffing percentages, etc. Thoroughly research all the aspects of the business before you decide on finalizing the sale. Ask all the important questions before signing anything from the seller. Having a checklist or organized documentation for your own reference can help you with this process.
How to Value an Existing Franchise
Some franchises have a healthy financial position, and some do not. When purchasing either of the two, make sure that you – as an owner – can impact the franchise’s financial position positively or that if it currently is performing well to not mess anything up and have the ability to maintain the investment. If not, you should reconsider buying the franchise.
Pricing a Profitable Franchise
In purchasing an existing profitable franchise, you have to first consider net cash flow. This number is computed by subtracting the necessary business expenses from the revenue. You may take out unnecessary expenses like company cars and outings. The price of a successful franchise business should be between 4-5 times its net cash flow, per a private equity firm we are closely involved with. The multiplier can reach up to 5 times if the company is growing at a steady rate.
Pricing a Non-Profitable Franchise
Pricing a non-profitable franchise is a little different. If you are interested in purchasing such a business, check the situation of the other franchisees. If the other franchises are doing well, check what the non-profitable franchise is doing differently. If you can profit with the business by making some changes, it might be worth pursuing.
Putting a value on a non-profitable franchise starts with the cost to open a new unit, including operating and marketing expenses. Subtract an amount for necessary infrastructure investments. This value should be the maximum amount you should be willing to pay. The seller might negotiate this type of valuation. Go ahead and negotiate. Not many people are interested in non-profitable franchises.
You may consult with a lawyer before finalizing the valuation.
How to Find an Existing Franchise
The question people often forget to ask about how to buy an existing franchise is “where to look for available options”?
If you haven’t come across a company yet, there are many existing franchise options available online. You’ll be able to sort through your options by location and industry.
Once you becomes a more seasoned investor the deals will start coming to you. We know from first hand experience.
Like with any business, your thoughts on buying an existing franchise should be focused on weighing the pros, cons, and risks. But the primary consideration should be whether you, as an entrepreneur, can make a positive change in an existing franchise.
As with any business, find a franchise that matches your strengths as an entrepreneur. In a franchise business, you will have to strictly follow the brand’s business model because successful franchises are consistent with their products and services no matter who owns them or where they are located. If you don’t want to follow an existing business plan, joining the franchise industry might not be for you.
If you think your skills as an entrepreneur can add value to an existing franchise, go ahead and buy one. It might turn out to be the dream business you’ve always wanted.
If you are interested in potentially owning a fractional share of a franchise, please register here to keep up to date on when we at FundingFuel intend to offer such a product to investors.