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Franchising can be a great way to own a business. Look for a proven operating system, strong unit-level profitability, a great management team, a differentiated and valuable product/service offering, and satisfied franchisees.
Most people who think about starting a franchise business end up looking at developing new units. That’s because most marketing for franchise opportunities is focused on selling new units. You may not even think about purchasing an existing unit or group of units. But if you are considering starting a franchise business, resale options should definitely be on your radar. Don’t forget that resale can also be combined with the development of new units! So it is not a case of “either/or” (new OR resale) but could be “yes/and” (new AND resale) for the right buyers.
Related: The Pros and Cons of Franchise Resale
Why you should consider resale options
Assessing resale options is a great way to understand the value potential of any system you’re considering. What do units sell for when owners retire? Is the brand too young to have a long resale history? Are the resales going to existing owners who want to expand (because their franchisee experience is positive), or just to new operators (who also don’t know the brand)? Do owners leave after a long tenure with a history of good cash flow, or shortly after joining because it didn’t work out? You can learn so much about a system by watching resale.
Second, it may be a better fit and less risk for many future franchisees to run a business that already produces cash flow. That existing cash flow can help you acquire more units or build new units much faster than if you started from scratch. With a resale, the company is already active. You will have a much better sense of the company’s potential, the competition and areas for improvement.
You can explore the site or territory. You can do mystery shopping and possibly meet the staff. You can assess existing marketing campaigns and spend and the impact on revenue. You can view several years of business results, including what happened during the pandemic. When you start a franchise from scratch, you can never be sure if a concept will catch on or if you can find a good location. You also need to hire and train your entire team. It can take up to three years to fully launch a new franchise unit. Yes, walking into a running business is a bit like drinking from a fire hose, but carefully assessing the business and having confidence in the existing team will get you up and running quickly.
Related: What’s old is new again for these two resale franchisees
Things to keep in mind
Keep in mind that franchise sellers earn commission on the sale of new units, not usually resale. Be mindful of their incentives when they give you advice. Large franchise systems usually have strong resale programs and well-established processes. But smaller brands often need some time to handle transfers in a coordinated manner. Don’t be put off if a younger system doesn’t already have a well-functioning resale program.
There are business brokers in every community with franchise resale options. You can also approach owners directly and let them know you’re interested. Especially if you only focus on resale opportunities and tell them that, they won’t see you as a threat and therefore may be willing to share information about the franchise that can help you decide if you want to keep looking within that system or other options to consider. options.
Between 3-5% of franchise units are typically transferred each year. FRANData forecasts that we will have closed 2022 with 792,000 franchised units in the US. Assuming 3-5% will carry over again this year, 23,760 to 39,500 potential resales become available. Of course, not all of those will transfer, and many will end up as multi-unit takeovers, especially in older systems. But it still suggests that there should be a robust number of units available after retirement as an option for you to consider.
Franchisees quit for many reasons. Retirement, the desire to capitalize on their years of hard work, burnout, relocations, illness, change in personal circumstances, etc. are all motivators. In healthy franchise systems, the cadence of the transfer is relatively predictable because it is linked to renewal schedules and the expiration of leases. There are only surprises if unforeseen personal circumstances lead to an exit. Unfortunately, for other brands, profitability issues are driving churn. When exploring resale options, make sure that system churn is a result of normal retirements and not a red flag about the viability of the system.
Related: Preparation is key to franchise resale
Finally, as you review resale options, listen carefully to what the business team is saying about the departing franchisee and the reasons for system turnover. Turnover is, of course, in a franchise system. Corporate team defensiveness about revenue is not. It’s incredibly bad form to blame franchisees for sales, but during mystery shops I hear “it just didn’t fit” more than 95% of the time. Keep in mind that the corporate team has the final say in who is accepted into a franchise system. If it’s really a case of bad fit, it’s a poor reflection of the company’s approval process.
Talk to as many franchisees as possible to understand if they are growing and investing in expansion units, including resale. Try talking to other owners who have obtained resales in that system. Did the company live up to their expectations? Have they continued to expand new units or other resales? How did they start strong and maintain early momentum?
You may find that the road to business ownership has been partially paved by an australiabusinessblog.com in your own community. They are ready to retire and are looking for someone like you to take over the running of the company.