Many people contact me who are interested in buying an existing franchised business, for example, an existing fast food restaurant, massage or weight loss franchised business.
In advising them, I tell them that there are two critical aspects to evaluating this opportunity.
- One aspect is evaluating the existing business in the same way you would any existing business opportunity.
- The second, equally important evaluation is to determine if the franchise is good.
1. Evaluate the Existing Business Location
In evaluating any acquisition of a business, a prospective buyer needs to perform careful due diligence.
The due diligence (or homework) should include a careful evaluation by an experienced business accountant of the financials of the business for the past few years.
In additon, the legal due diligence should include evaluating any employee contracts and benefits, existing leases (both real estate and equipment) and other contracts the business may have that are on-going liabilities or obligations.
A determination of how an on-going obligation, that has been pre-paid, should be handled, is important.
2. Evaluate the Existing Franchise & Support
In addition to the evaluation of the existing business, when that business is a part of a franchise, it is important to evaluate the franchise.
This evaluation should include these four factors:
- Investigation by the prospective buyer of the support and training the franchisor provides;
- How other existing franchisees feel about the support and training they received and continue to receive;
- Evaluation of the franchise agreement that the buyer will be required to enter, and;
- A complete understanding of the obligations that the buyer will have to the franchisor and the expectations the buyer should have of the franchisor.
Many prospective buyers of franchised businesses make the mistake of thinking that the evaluation of the existing business is all that matters.
This can be a costly error.
(This post does not create an attorney-client privilege and is not intended to provide legal advice for any particular situation.)
Great thing about buying an existing franchise is you get the numbers to base your offer on and make your buying decision.
But Nancy is right you have to determine if the franchise model, franchisor and franchise system are worth you risking your capital.
It is interesting that Nancy highlights investigating support and training - since the quality of this differs vastly amongst franchisors.
Good questions to ask, better to know how to find out if the answers mesh up with what the FDD actually says.