The Pros And Cons Of Buying An Existing Business

Emma Lusty, senior associate at Hamilton Pratt, on the pros and cons of purchasing an existing business

According to the latest British Franchise Association NatWest franchise survey, the contribution of franchising to the UK economy is estimated to be over £15 billion, with over 600,000 people employed in the sector. In addition, franchisee owned businesses are becoming larger and more profitable.

The big banks have teams dedicated to providing services to franchisees and franchisors and those banks are increasingly willing to lend to franchised businesses.

Good time to invest

In addition, there are now franchise specific private lending funds becoming available, so there has never been a better time to invest in a franchise business, particularly one that has been trading for some time and is experiencing profitable growth.

The advantages of buying a franchise resale are many and varied. While many prospective franchisees are attracted by the comparatively low start-up costs associated with starting a franchised business from scratch and want the challenge of building something from nothing, others want to step into a business that’s already generating a profit from an existing customer base.

For franchisors, particularly those with a mature network of franchisees, franchise resales offer a great opportunity to bring new lifeblood into their systems, particularly when they perhaps do not have any free territories remaining.

Prospective franchisees

For many prospective franchisees, it may simply not be an option to acquire a franchise resale due to the greater cost of doing so.

If you do have the wherewithal and decide to consider existing franchised businesses for sale, they are often advertised online in one of the many online directories.

If you have an interest in a particular franchise brand, speak to the franchisor directly - it may have franchisees who are thinking of selling and be able to put you in contact with them.

Once you’ve found a business you want to acquire, you need to ensure you carry out a thorough due diligence exercise.

Establish why the franchisee is selling. Is the business profitable and financially stable? Does the territory that has been granted by the franchisor still have scope for growth or has the business reached its maximum capacity in that territory? Is there scope for expansion by buying neighbouring territories?

An important consideration from the outset is whether the sale will be of the assets of the business or the shares in the franchisee company. Both have their advantages and disadvantages and you will need to take advice from your legal and financial advisers at the outset to establish the implications of each option.

In our experience, it’s becoming increasingly common for franchise resales to be share sales, which is generally due to the tax advantages of selling shares, but that should not be the only driver for structuring a deal in a certain way.

Even if the franchisor has in place a procedure for dealing with franchise resales, which may include the provision of a template sale and purchase agreement, both buying and selling franchisees should always take their own independent legal and accounting advice, ideally from advisers who have specialist knowledge about franchising.

Franchisor involvement

Many franchisors adopt the approach that they do not need to be involved when their franchisees decide to sell their businesses.

Franchisors ought to be involved in the process from the outset, not only of the sale process itself, but also in terms of educating franchisees about how they are going to exit the franchise.

It seems counterintuitive, but franchisees are investing a great deal of money into their franchised business and should be encouraged to formulate a long-term plan as to how they intend to obtain a return on that investment.

Selling a franchise does not happen overnight, but it’s much easier to sell a franchised business that has been preparing for sale.

Not only will the business be easier to value, a clean business will likely be worth more and the due diligence and sale process will be much less painful. As a result, it will also be a lot quicker and cheaper.

Franchisors should, therefore, continually encourage franchisees to consider their exit plan and encourage franchisees to prepare their businesses for sale long before they are ready to sell.

Most franchise agreements give the franchisor the right to require its franchisees to follow its procedure on resales and use the franchisor’s standard documentation. The key is for franchisors to be involved in the process at the very beginning and take control of the transaction. If the franchisor has been actively engaging with franchisees from the start of their franchise journey, this should be straightforward.

Engagement enables franchisors to monitor progress, to ensure that the documentation is entered into correctly - neither franchisors nor franchisees want a situation where a sale is completed, so a new franchisee owns the business, but has not signed a franchise agreement giving it the right to operate that business - and to recover any money due to it as part of the completion process.

It also means that the franchisor’s teams can be ready to deal with the transition from one business owner to another, including having support staff on the ground if necessary.

The key thing for both franchisors and franchisees to remember is that preparation is essential when it comes to the success of a franchise resale.

Franchisees need to ensure that the business is ready for sale and franchisors need to ensure they have a resale process in place to enable the resale to be as streamlined and trouble free as possible.