How to terminate a franchise agreement
Although a franchisor will give you the tools,...
A “RE (ready & established)-franchise” opportunity is one of the most efficient and quickest ways to enter a franchise system. Essentially an incoming franchisee is assuming an existing franchise unit that is “ready & established” and successfully operating. As such, the due diligence and valuation may differ from a new or unestablished unit.
Keep the following in mind as you explore this option:
Within any healthy franchise system there are always locations available for RE-franchise. Franchisees choose to leave systems for a variety of reasons such as illness, retirement, marriage breakdown, lack of passion for the business, profitability or perhaps they are seeking a new challenge or a change. Part of the due diligence process will include figuring out exactly why the franchisee has chosen to leave the system.
Since the franchise is already in operation, sales history and financial statements should be available for review. The price may be more or less than a new location and with professional assistance, it may be easier to obtain financing and create a business plan or budget for an existing business.
Because the business is established in the local community, general awareness and knowledge of the brand may exist. Find out how well known and established the brand is within the local community and how the existing franchisee has contributed and been involved.
Assuming an existing location may be a quick and efficient way to predict and manage operating cash flow. As well, the transition time may be less than if you were to start a brand new location, especially if it is a ‘bricks and mortar’ concept. The length of time the business has been operating may vary but local marketing programs, staff, service level agreements etc. should already be in place, and the business should have an established client base.
Make sure you are aware of the term remaining on the franchise agreement and understand that you are only “guaranteed” to operate the franchise until the expiry of the franchise agreement. For example, if only two years remain on the franchise agreement, you are only guaranteed to operate under the brand for that amount of time. Find out what options may be available to extend term as this could affect the financing options available. In many cases franchisors may agree to allow you to purchase additional term.
Ultimately, the franchisor will have the final say in approving you as a franchisee and the re-franchise transaction. Understand that they entered this agreement with one party and now, part way through agreement they are being asked to change partners. The franchisor will always want to be sure that the new partner is as good as or better than the existing operator and will have certain criteria that must be met- financial and otherwise. A re-franchise opportunity may be a great way to get into a successful and proven location. No matter which option you chose, if you are prepared and have done your “due diligence,” you can approach the opportunity with confidence.
“Diligence is a priceless treasure; prudence a protective charm.” Chinese Proverb