There are pros and cons to buying an existing franchise. If you do your research, you can find some great investments. Many people will shy away from a franchise that is not performing well because they feel it is just a bad business. That may not be the case.

An existing franchise unit that if for sale is considered a “resale” in franchise speak. There can be many advantages to buying an existing unit over a new unit. But it can be a nightmare if you don’t know what to look for during your research.

We recently spoke to the owner of a national ice cream franchise who purchased the business several years ago. They are very happy with their purchase and are preparing to hand over the day-to-day operation to their daughter. When they bought the business, the previous owner said that an ice cream business was not a good fit for the area.

The new owners did their research and determined that an ice cream store can do very well. They just needed to do some basic changes. The previous owner was not following the system laid out by the franchisor, they did not keep the store clean, and they found out the employees were giving away ice cream to family and friends.

On the contrary, buying a successful franchise does not guarantee success. A previous owner of a very successful franchise had to sell due to health reasons. The franchise, under new ownership, performed very well for the first couple of years. The new owner started making changes that deviated from the franchise system and revenue dropped quickly.

We personally purchased a failing franchise for less than the franchise fee. Within two years, we were able to make the business profitable. 

While the purchase of a resale is a transaction between the franchisee (seller) and you (the buyer), there is one difference between a franchise resale and purchasing a non-franchise business. The franchisor will make the final determination about who can buy the franchise. The franchisor must protect their brand and the buyer will need to meet many of the same criteria that the new franchise owner would need to meet. In most cases, that means you will need to attend Discovery Day and complete any required paperwork, like any new franchise prospect.

Resales typically fall into two categories; those making money and those failing to perform. Remember, just because a unit is under performing, does not mean that if is not a good investment. Therefore, your due diligence is so important because you will discover which category the resale belongs.

The first question to ask is “Why is the reason the seller is selling the business?” Keep in mind that there may not be one single reason. For some, they are ready to retire and take it easy. While others may have personal reasons for selling. Don’t expect everyone to 100% honest when answering this question. You will need to put on your Dick Tracy hat (I think I am showing my age by that reference) and do a little investigating. You should speak to competing franchises or businesses and you will speak with the franchisor (who may be a little bias), as well as any trusted advisors.

Some of the things you will need to find out:

  • What is motivating the seller to sell the business? Is the reason believable?
  • Can this business have a positive future performance with a new owner? In many cases, the current owners have become burnt out and new ownership can take a business to the next level
  • Review the financial performance for the past few years? Are there any trends? If there is a flat trend, find out why?
  • You will want to know the status of the employees? Pay attention to key employees and may sure they will be staying. I know of a resale where a key employee was not disclosed at the time of sale and the employee left with the old owners.
  • If real estate is involved, make sure there are no issues in continuing the lease. You don’t want to sign a 10-year franchise agreement and find out that you are not able to renew the lease after it expires in two years.
  • Talk with the franchisor to confirm the information you have received from the seller. They may not want to do this, due to legal liability. On the other hand, it is in their best interest that you don’t join the system under false pretenses. If the seller is not being honest, you will often be able to pick up on this with a short conversation with the franchisor.

In summary, buying an existing franchise is a great way to become a franchise owner. There are many benefits and like any investment, you will need to do your homework. Getting qualified advisors is highly recommended.