Why a franchise resale is the logical option

Compared to a new franchise in a greenfield location, franchise resales win every time, says Derrick Simpson, managing director of Franchise Resales

In life, we are told, there should always be a balance. For every up there is a down, for every plus there is a minus, for every yin a yang. Getting the right balance in life helps with the decision making processes we all have to go through.

Life also has options at every stage - when to leave school, what subjects to specialise in, commerce or industry for employment, this person or that for a partner, to have children or not. The list is endless. Almost every second of the day one decision or other has to be made and with the vast majority of decisions there will be a choice of options available from which to select. Not all decisions are momentous; it may come down to which sandwich to select at lunchtime, but all the while it’s decisions, decisions, decisions.

Stability
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When it comes to planning our futures, there are more significant decisions to be made. Should you beaver away in employment with the relative stability that environment offers or set up in business for yourself and seek to protect future income and provide for your family that way? Another option is buy into the security of a business format franchise. These are substantial decisions, but ones where there are clear guidelines and advice available.

The British Franchise Association and NatWest survey of UK franchising recently reported that 91 per cent of trading franchisees stated they were profitable. When this is allied with the fact the UK franchise sector grew by eight per cent, which is more than 10 times the overall current growth of the UK economy, the decision of whether to set up on your own versus joining a franchise is not that hard to make.

From my perspective, the decision after that - to buy an existing franchise business as opposed to starting a new franchise in a greenfield location - is also clear cut. Franchise resales win every time over cold new starts. Why is that? Why should an existing franchised business be the way to go over a new location? Let me run through the pros and cons as I see them.

Pros
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* Because a franchise resale is already trading, it has cash flowing through it from day one. This means that a new owner of the business will require less working capital to operate it on a day to day basis, which will reduce the level of money that may need to be borrowed.

* As the franchise is already up and running, there will be trading records showing clearly how the business has operated. A purchaser can therefore present realistic proposals to the franchise units of banks to secure funding, while the banks can see the evidence of what has been done previously - they don’t have to rely on projections. This simple fact can make the whole process of funding a business easier, smoother and more likely to happen.

* A new business is usually cash hungry, as it has to be grown from a standing start with zero income on day one. Quite often, the working capital element of setting up a new business means some very large sums of money are required to maintain it following launch. In this respect, a lot will depend on the income or drawings the owner needs to take while growing the business. A franchise resale may well allow an owner to take income from the business proceeds, whereas a new start business most likely will not.

* An existing franchise is known in the local marketplace. That all important brand awareness has already been achieved and there will be customers and suppliers in place for the new owner to develop further. In addition, there is less of a requirement to source new clients and customers, as they are already in place with an existing business. That doesn’t mean there is no marketing involved with a franchise resale, as all businesses, whether new or existing, require continual promotion.

* If staff are required in the business, they will already be in post to continue to do what they have been trained for, allowing the new owner to focus on developing and growing the business further. The owner doesn’t have to be sourcing, recruiting and training new staff while they are out seeking clients and customers. The same applies to any premises that may be required. The rent or lease arrangement will already be in place, so there’s no need for distracting property negotiations.

* With a franchise resale, the role of the new owner is that of sales development - taking the existing customer base and developing it further. A ‘farming process’ is one way to describe this type of sales approach. A new start franchise requires an active sales approach from before the opening date to ensure there is some form of business opportunity to go after. This could be described as a ‘hunter gatherer’ approach, as opposed to the franchise resale farming style.

Cons
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* Even with all the positives described above, there are clearly going to be some downsides to taking on an existing business. The main one in this category will usually be the price. It is likely - though not necessarily always - to be more expensive to purchase an existing business than setting up a new franchise. This is because an existing franchise’s value will have been calculated based on its profitability and past performance, whereas a new franchise’s costs are mostly the fees payable to the franchisor. A higher price may mean larger funding requirements and, therefore, a larger cash injection required from the purchaser. Most banks will fund a higher percentage of the working capital requirement for a franchise resale, but even so there still needs to be a part cash injection from the purchaser.

* It is possible the franchisor will ask the purchaser to update some of the equipment or software in the business being purchased. It may well need any premises updating, such as interiors and facia, if it is a premises based business. The franchisor’s view on additional costs should be discussed and agreed in advance.

* There will be the purchase price to negotiate as part of the acquisition process. If, however, the business has been prepared properly for sale with a detailed prospectus of sale and accounts provided, this should be less of an issue. At Franchise Resales we take the role of broker in the negotiations and so ensure a balanced transaction for all parties.

I think every person who is considering setting up in a franchised business should seriously consider and investigate the potential to purchase a franchise resale. It is a logical option to explore and one that provides a solid base from which to develop your future business.

Starting a business is a long term commitment and so it is important to take the time to investigate all options thoroughly before making a decision. Make franchise resales one of them.