Franchise resales are a hot topic for aspiring entrepreneurs who don’t want to start from scratch, but to understand the world of franchise resales, it’s important to consult an expert. Mike Halpern, CAFC, owner of Franchise Freeway, a FranServe, Inc. affiliate, is just that. Halpern was asked to share his knowledge and insights on this topic. By Nancy E. Williams
Franchise resales are a hot topic for aspiring entrepreneurs who don’t want to start from scratch, but to understand the world of franchise resales, it’s important to consult an expert. Mike Halpern, CAFC, owner of Franchise Freeway, a FranServe, Inc. affiliate, is just that. Halpern was asked to share his knowledge and insights on this topic.
What’s the difference between a franchise resale and an independent resale?
A franchise resale is an open and operating business for sale that also happens to be a franchise. The successful acquisition of a franchise resale involves signing a franchise agreement with the franchisor, an asset purchase agreement (APA) with the selling franchise owner, and, if applicable, a lease or leases with the landlord.
An independent resale is also an open and operating business but without the benefits of being part of a franchise system. Beyond the negotiated post-sale seller obligations, there is no ongoing operational support.
What are the pros and cons of buying a franchise resale versus a franchise startup opportunity?
Purchasing a franchise resale includes instant access to clients, revenue, cash flow, reviews, market reputation, vendors and employees who are already familiar with operating the business. Additionally, the buyer enjoys all the benefits offered by the franchisor as if they had signed on for a new franchise.
However, inheriting the seller’s problems and paying a premium for skipping the startup phase presents risks. Thorough due diligence is required with a CPA and/or a valuation expert to review the tax returns, profit-and-loss statements and balance sheet to ensure the quality of earnings is consistent. Engaging a franchise attorney to ensure there are outs if negative discoveries arise after the seller accepts the buyer’s offer but before the transfer date is critical.
Is it more expensive to buy a franchise resale?
That depends. I helped a client acquire a home-services franchise resale for $2 million, which is $1.5 million more than it costs to start a new franchise. He decided to pay a premium cash flow multiple to gain access to a predictable operating business. I also helped a client acquire a franchise resale for $1, which normally would cost $500,000 to start up. However, it was a negative cash flow franchise resale, requiring an investment of $200,000 in working capital to cover the projected operating losses.
Franchise resales come in all shapes and sizes. It’s important for clients to build a team of experts for guidance when evaluating franchise resales.
What advice would you have for a client interested in acquiring a franchise resale?
Get off the sidelines and get in the game! Find an expert franchise consultant who specializes in resales to educate you on the merits of franchising and cast a wide net to include both franchise resales and startups. Have a funding strategy in place so your offer stands out to sellers. I’ve worked with clients who were only interested in franchise resales but ultimately pivoted to franchise startups, and vice versa. Educate, validate and be ready to act once the right opportunity surfaces.
Nancy E. Williams