8 Tips To Guide You In Buying An Existing Franchise Business

Like any business endeavor, you should learn the ins and outs of franchising before striding toward entrepreneurship. There are two options when starting a franchise. You can either open up a new franchise location or buy an existing one. If you choose to operate an established business, there are things that you need to consider. We’ve compiled some tips for buying an existing franchise business. 

1. Understand the Franchise Disclosure Agreement 

The initial step in purchasing a pre-established franchise business is to review the franchise disclosure agreement (FDD). An FDD is a legal document that franchise owners give to franchisees before they complete their purchase. It outlines 23 items franchisees must understand, including fees, the legal relationship, and the company’s history. 

Other related information can vary depending on state requirements. You must understand every aspect of the agreement because you will be responsible for holding up your end of that agreement as much as the previous franchisee was. 

2. Review Transfer Requirements

As the franchisee, you must consider the prerequisites of transferring the franchise to a new owner. Ensure that no restrictions may prevent the franchise transfer to you. In some instances, franchises have the Right of First Refusal (ROFR). The ROFR is a contractual right granting its holder the option to transact with the other interested party before others can. 

3. Determine the Business Value

It is essential to read customer reviews to identify whether or not a product or service is worth investing. In the case of buying an existing franchise, getting a business valuation is extremely necessary. The value of a good franchise varies depending on various factors such as: 

• Current Inventory
• Equipment
• Assets 
• Business goodwill

It is recommended to consult a professional who can conduct an objective appraisal of the business value. The American Society of Appraisers is one of the organizations that offer a professional business valuation. 

4. Know Why the Current Franchisee Is Selling

There are many probable reasons behind a franchisee selling their existing business. It may be due to family matters, financial difficulties, or retirement. But, their decision to sell could be based on something more serious such as conflict with the franchisor or the business failing. If the reasons for the sale are due to management-related concerns, you must consider whether or not these are issues you can address as a new franchisee. 

5. Learn More About the Seller and Franchisor

Learning more about how the franchisee is perceived in the local community and its reputation is essential. Doing this can prevent you from investing in a business that may need a lot of damage control to rebuild its reputation. You can ask other franchisees how they feel about the franchisor. In addition, you can talk with existing franchise employees you plan to purchase.

6. Examine Financial Records

Naturally, you will want to buy a business that can generate income. Ask the seller to present the financial records of the franchise over the past three years. Financial records should include the following: 

• Income Statement
• Balance Sheet
• Cash Flow Statement
• Profit/Loss Statement 
• Outstanding Debts

7. Pay the Transfer Fee

When buying an existing franchise, most franchisors require you to pay a transfer fee to cover the resale cost. It also covers the costs of evaluating you as the new owner. This fee is paid either by the seller or buyer. Regardless of who pays it, the transfer fee must be paid before the transfer can occur. So, include the transfer fee when negotiating the overall purchase cost. 

8. Hire a Franchise Attorney

Franchise law is a specialized area of law, and not all attorneys are familiar with it. A franchise attorney has specialized knowledge and experience in this area and can help you navigate the legal complexities of franchising. Since it is important to protect your legal rights, a franchise attorney will help you ensure compliance with franchise laws and regulations. More importantly, they will guide you to prevent legal pitfalls that can arise in franchising.

Conclusion

Buying an existing franchise can be an intelligent decision for entrepreneurs who want to start a business with a proven concept and established brand. With this technique, you can benefit from the franchise’s existing customer base, marketing strategies, and operational processes, which can help you save time and money in the long run. However, it’s crucial to conduct thorough research before making a decision. You should ensure that the franchise is a good fit for your goals, skills, and budget.