What Does a Resale Franchise Involve?

Author: shawna@frantechmedia.com

Date: OCT 29th, 2013

Topic: Industry Experts

One entrepreneur's exit strategy can be another's profitable investment. Statistics show that businesses are generally resold within five years. Some entrepreneurs buy franchises with the intention of building them up to their peak in order to flip them for a quick return. Others choose to sell on retirement, for health reasons or due to family changes.

Is this a good thing?

Small Business Owner

Resale is among the healthiest revenue generators in the retail segment, but there are both cunning and ineffective ways to choose established franchises. Some have proven their mettle through decades of successful trade, whilst others begin to fail purely because they need new blood to enliven them.

Gaining in Popularity

Resales are becoming more popular in the franchise world, since they offer a mature foundation and a prepared market share. They are often indicative of a more vibrant market, but in rare cases, they indicate a failed brand and business model. Resale is not the ideal option for every entrepreneur. Different skills are required to improve the profitability of an existing franchise.

What research is required?

The research required of a typical new franchise buyer has a wider base than that required of a resale investor. In the latter case, the entrepreneur needs to investigate the actual franchise as it functions in its location without neglecting assessment of the franchiser's business model and support infrastructure.

A Couple Franchisees

Making sense of a franchise's profits or losses demands a thorough understanding of the elements that bring failure or success. A botched business may not be evidence of a poor franchise model. Some franchises move rapidly from failure to success with the support of a franchisee with a talent for producing revenue.

The Financial Statements

Three years' worth of financial statements should be assessed to establish the concrete facts of returns and sales. Examinations of monetary history create a background image that helps the franchisee to make an informed decision. These figures may provide a forecast for how the franchise will perform in the future. However, financial statements need to be contextualized in terms of the management style of the seller and the fluctuating market conditions relevant to the franchise.

Fortunate resale investors will be buying a solid market share with a pre-existing loyal client base. The core goal of building an existing franchise lies in the classic 80/20 rule that states that most profits are generated from a small percentage of your customer base. By expanding the 20% representing repeat clients, an established resale franchise can be grown substantially.

A Turnkey Operation

Coffee Shop Owner

Resale franchises offer a true turnkey operation. Store location, equipment and staffing are already established, offering the investor a business that is instantly ready for trade. At times, personal and financial reasons for selling offer new franchisees a more flexible purchase price. The initial start up costs are shrunk down to a tolerable size, as initial investments have already been made. The established unit may bring the need to renovate and repair old equipment.

Similarly, any damage a poor franchisee may have done to the brand through word of mouth advertising and de-motivated staff may need to be mended. A precise monetary amount entailing such repairs and third party claims should be arrived at. In most cases resale franchises are sold voluntarily. Instant cash flow and natural turnover offer structured systems that an entrepreneur with new energy can resurrect.

Hopefully this helps give you an overview of what is involved in purchasing a resale franchise. Its clear there are positives and negatives to this approach. In the end, it comes down to what you are comfortable with. Ask yourself, is a resale business a challenge you are excited to tackle?