The franchise world is an interesting, fun, and confusing world. There are many ways to purchase, own, and run a franchise. One popular way to get into franchise ownership, is to buy another franchisee’s business. This is called a re-sell. The franchise is currently owned by a franchisee owner-operator that for whatever reason wishes to sell before the end of the franchise agreement. These types of opportunities are quite prevalent. But in the haste of finding and owning a business, many franchise buyers neglect to look deep enough when considering a re-sell. Rather, all attention is paid to “price”. Much is made of “price”. This is understandable, as nobody wants to overpay for something. And everybody wants a value. But too often price and its various economic components become the beginning, middle and end of any discussion on the value of a business. This is a mistake!
Take for example the “real world” illustration below:
You have found what you consider to be your “dream” franchise. It is a re-sell. You have had many discussions with the current owner and now you are just trying to figure out price. Last year the business generated $200,000 in gross profit. The cost of goods sold equalled $50,000. That means the business’s gross income before expenses is $150,000. It’s expenses (utilities, payroll, taxes, insurance, and advertising total $60,000). Plus some flexible personal expenses of the current owner, including travel, car, etc., that add another $20,000. In total, the business’s expenses equal $80,000. Leaving a net income of $70,000 ($150,000 – $80,000).
Most people at this juncture, figure a multiplier of the net income to come up with a fair price. And while this may be good for the seller, buyers need to dig deeper. But how do you dig deeper? Below are 14 questions that provide 14 ways for you to dig deeper before you buy your re-sell franchise.
- What amount, if any, does the business owe to creditors?
- Are the creditors secured or unsecured creditors?
- What are the businesses other liabilities?
- Will you remain in the same location?
- How much time is left on the lease?
- Are you assuming the lease from the prior owner, or signing a new lease?
- What is the surrounding 10 mile radius around the business like?
- Do you know the area?
- Are the employees of the business staying or leaving?
- Do you want the employees to stay or leave?
- How do you get rid of problem employees and not inherent bad practices and problems?
- How much is the franchisor required Transfer Fee?
- Is the seller willing to split or cover the Transfer Fee?
- What are the other Franchisor requirements that will be placed on you?
This list is not exhaustive. But going through the exercise of asking these questions, will uncover many important aspects of the business that you think you want to buy. Buying a business is not an exact science. But there is no such thing as too much due diligence. Buyers should always beware, and be cautious before buying a re-sell….despite the attractiveness of the price!
So tell me, what questions are you asking as you search for the perfect business opportunity?