Franchise Resale: How to Buy an Existing Franchise Business

Investing in a franchise allows you to capitalize on the reputation of a well-established brand, which reduces many risks associated with building your own brand from scratch. However, even with a franchise, there’s no guarantee you’ll get customers, and it can take a while to generate a healthy profit. This is why many franchisees buy an existing franchise through a franchise resale. Franchise resales will give you immediate access to an established franchise location and a loyal customer base.

But what exactly is a franchise resale? And is owning an existing franchise business worth it? I’ll answer both of these questions and more in this helpful guide on franchise resales.

Key Takeaways

• A franchise resale involves purchasing an existing franchise location from a current franchisee, offering immediate operational status and an established customer base.
• Benefits include existing cash flow, trained staff, established supplier relationships, and a known brand presence in the community.
• It’s crucial to assess the franchise’s financial health, understand the reasons for sale, and evaluate any necessary improvements or investments.
• Conduct due diligence by reviewing financial records, speaking with the franchisor, and consulting current franchisees to understand business performance and potential challenges.
• Most franchise agreements require the franchisor’s consent for a resale, ensuring the new owner meets their standards and qualifications.
• Purchasing a franchise resale can be a strategic way to enter franchising with reduced startup risks, provided thorough due diligence is conducted.

What Is a Franchise Resale?

A franchise resale occurs when an individual purchases an existing franchise from a franchisee rather than the franchisor. There are essentially two ways to buy a franchise. You can go the traditional route and purchase the franchise directly from the franchisor, or you can opt for a franchise resale and buy the franchise from the existing franchisee.

For example, if you wanted to open a brand-new McDonald’s, you would become a franchisee for McDonald’s. But, if you are looking to purchase an established McDonald’s franchise, you can also buy an existing McDonald’s from the existing franchisee and become the new owner of the franchise. 

Reasons Franchise Owners Sell Their Franchises

Naturally, before buying a franchise resale, you’ll need to find out why the current franchisee wants to sell their franchise. The last thing you want is to take over a business with crippling debts, disputes with the franchisor, disgruntled employees, and a falling revenue stream. Fortunately, many franchisees wish to offload their franchises for perfectly valid reasons, such as:

• The franchise agreement is expiring, and the franchisee doesn’t want to renew
• The franchise is struggling, and the current owner doesn’t have the willpower to fix it
• Franchisee is retiring
• Franchisee has new business interests
• Changes in personal circumstances (illness, relocation, etc.)

Don’t be afraid to ask the franchisee why they want to sell up. In fact, I urge you to ask the existing franchisee why they plan to sell — it’s a very reasonable question, given the nature of the commitment.

How to Buy an Existing Franchise Business: Step-by-Step

Are you convinced that buying an existing franchise is the best option for you? While franchise resales certainly aren’t rocket science, buying one is a slightly different process than with a standard franchise purchase. Here is my handy step-by-step process for buying a franchise resale.

Step One: Determine If a Franchise Resale Is a Good Choice for You

Purchasing an existing franchise might sound like a surefire way to make a return on your investment. Of course, investing in a franchise resale is often a fantastic way to make a fast and significant return, but that doesn’t mean it’s for everyone.

It is crucial to fully understand what operating a franchise will look like before throwing down your money and signing the franchise agreement. Many investors have found themselves contractually obligated to pursue the goals of a franchisor they have very little interest in. Don’t just invest in a franchise resale for the money – you might find that your motivation and satisfaction start to wane regardless of your income.

Step Two: Research Franchise Resale Opportunities

If you’ve decided that a franchise resale is the right investment for you, it’s time to start shopping around. One of the most straightforward ways to find franchise resale opportunities is to research franchises using Franzy.

Franzy is an online marketplace designed specifically for potential franchisees and franchisors. The platform is simply the best way to make data-driven decisions and compare different franchises.

Step Three: Investigate Your Options and Conduct Due Diligence

Naturally, you may not be able to spare the time and resources to read the fine print of hundreds of different franchise resale opportunities. But you really should conduct your due diligence once you’ve narrowed your potential choices down to a few.

First and foremost, when buying an existing franchise, it’s crucial to find out exactly why the franchisee is selling. If the current franchisee is simply retiring, then you might be in luck. But if the current franchisee is in constant dispute with their franchisor, it’s worth further investigation.

Also, remember that in many cases, the franchisor has the right to buy the franchise first. Before pressing ahead with anything legal, make sure you have a right to invest.

Step Four: Read Through the FDD

The Franchise Disclosure Document (FDD) is your most valuable asset when it comes to deciding whether or not to invest in a franchise resale. The FDD contains most of the information you need to determine what’s involved in running the franchise and whether or not purchasing the existing franchise is a good decision. FDDs will contain information on the initial franchise fee, ongoing royalties, branding and advertising information, training requirements, litigation history, bankruptcies, and more. I recommend hiring a lawyer who is familiar with franchising to help you comb through the FDD. By law, you should receive the FDD at least 14 days before signing the Franchise Agreement.

Step Five: Meet With the Current Franchisee

Be prepared to spend some time getting to know the current franchisee of the franchise you wish to purchase. It will benefit you to become comfortable sharing information with each other so that you can both make an informed decision. Meeting in person with the existing franchisee is a great way to build trust. After all, you are potentially taking over a franchise they have built from the ground up, so it is important to forge some mutual confidence.

The current franchisee is unlikely to share every detail and trade secret about the franchise with every prospective buyer. Instead, they want to gain a degree of confidence that you are a real potential buyer and not just somebody who’s wasting their time.

Step Six: Get Approval From the Franchisor

As mentioned above, you’ll almost always need permission from the franchisor to buy a franchise resale, even if the current franchisee has already agreed to the transfer. Often, franchisors have first dibs when it comes to franchise resales. At the very minimum, the franchisor will need to make sure you meet their requirements. After all, they’ll be trusting you to protect and promote their brand.

Step Seven: Secure Financing

Before you start to set your terms or find some wiggle room in the negotiating stages, you should secure financing for the franchise. You’ll need significantly less startup funds when purchasing an existing franchise since you won’t have to build out the location or hire and train staff. However, buying a franchise resale is still a major investment, and most investors will need to secure funding before finalizing the agreement.

Even if you have plenty of capital, it’s worth securing financing in order to prevent risking such a major chunk of capital.

The good news is that there are many different forms of funding for franchise resales, including:

• SBA loans
• Standard bank loans
• Crowdfunding
• Rollover as business startup (ROBS)
• Home equity line of credit (HELOC)

Remember: borrowing comes with risks, making it super important to do your homework before signing any contracts.

Step Eight: Negotiate the Sale

It’s absolutely crucial to get a business valuation before investing in an existing franchise. Franchisees often obtain their own appraisal in the event of a franchise resale, but it’s well worth acquiring your own impartial appraisal just to be sure.

The valuation may vary depending on factors such as equipment, current inventory, assets, and any business goodwill (such as recognition of the fact you’re gaining access to an immediate revenue stream). 

You might also want to view the franchise’s financial history to give yourself some extra negotiating wiggle room. While the IRS only suggests businesses store financial records for seven years, many don’t follow this recommendation. However, the current franchisee should be able to provide financial information for at least the past three years.

Step Nine: Review and Sign the Franchise Agreement

While the FDD contains information for you to consider the franchise, the Franchise Agreement (FA) is a legally binding contract. Once signed, you’re the official franchisee – which means you’ll need to meet a variety of obligations.

Make sure you’re aware of your duties as the new franchisee. Naturally, your franchisor will make sure you continue to pull your weight. The franchise agreement will contain details such as your fee structure, minimum sales requirements, territory rights, dispute processes, termination procedures, and much more. Familiarize yourself with these details like the back of your hand.

Step Ten: Create a Transition Plan for the Handover of the Franchise

In most cases, the current franchisee remains with the franchise alongside the new franchisee for a period of time to ensure a smooth transition. This is an important detail, and you should negotiate it in advance.

Many sellers will be eager to move on to new ventures, but it might take you several weeks or months to learn the ropes. If you have an agreed-upon transition period, you can make sure your customer base receives the level of excellence they’re accustomed to while you gradually get used to the new business structure.

Step Eleven: Pay All Fees and Finalize Franchise Resale

Now that you’ve signed your Franchise Agreement, it’s time to pay all your fees and finalize the franchise resale. You should double-check that you’ve signed all necessary documents, including any lease agreements and transfer agreements. Then, you can take official ownership of the franchise and prepare for your big launch.

Step Twelve: Launch Your Ownership

As you’ll be taking over an existing franchise, you may not need to launch a grand opening as investors in new franchises often do. However, you may be required to officially notify all your stakeholders, including your employees, suppliers, and possibly even customers.

With all those 12 steps completed, you’re in business! You’ll be the proud owner of an already successful franchise (provided you’ve done your homework) that could make you a quick and significant ongoing return.

Benefits of Purchasing a Franchise Resale

Investing in a franchise resale is the perfect business decision for some individuals. Here are some of the key benefits of buying an existing franchise.

Established Business Location

Researching a suitable location for a franchise can be time-consuming and next to impossible in some cases. It’s not just that you need a location that will attract customers, but it also needs to comply with the franchisor’s strict requirements. Invest in a franchise resale, and all that hard work is done for you.

Pre-tested Market

Just because a franchise sells the services of a well-known brand doesn’t mean success is guaranteed. However, by doing your homework, you can find a franchise resale that’s already bringing in solid numbers. Some franchises can provide financial records dating back years that prove their revenue streams are healthy and have potential.

Immediate Cashflow

If you’re looking for investments that have the potential to yield rapid returns, a franchise resale is hard to beat. These businesses are already generating money, and they’ve had an established presence in their location for years. When you purchase a new franchise, it can take up to 2 years to see any profit. But often, franchise resales see profit almost immediately.

Ability to Negotiate the Price

You generally have more wiggle room regarding the negotiations with a franchise resale compared to a new franchise. It can be difficult to negotiate with franchisors, as they often have more power in the agreement than a new franchisee. At the end of the day, a reseller wants to sell their franchise quickly, while a franchisor may have a long queue of eager investors.

Fewer Startup Costs

When you invest in a franchise resale, you eliminate a whole host of startup costs, such as location build out, purchasing new equipment, and hiring new staff. Of course, there are still plenty of expenses associated with franchise resales, but they are a great option if you are looking to purchase a franchise without as many startup costs.

Downsides of Buying a Franchise Resale

No investment is without at least some risks and downsides, and franchise resales are no exception. Here are some drawbacks to consider when determining if buying an existing franchise is right for you.

Higher initial Fee

An existing franchise that already has a healthy revenue stream and a solid customer base is likely to be valued higher than a new franchise. Moreover, the resale price may include ‘goodwill’ due to the brand’s reputation and established local market. Don’t forget to check that the franchise you’re inheriting isn’t in debt or in need of renovation.

May Be Some Transition Challenges

Be prepared to face a few challenges when starting out. For example, you may need to pay attention to morale if employees feel uncertain about the change in ownership and management. You may also need to accustom yourself to the preexisting expectations of your customer base.

Possible Operational Issues

You might have many ideas you wish to implement, but it’s worth remembering that this is an established business with a team of employees who already do things a certain way. You may need to make compromises and get used to new ways of doing things.

Franzy Is Your Best Friend for All Franchise Research

If you’re considering diving into franchising, buying an existing franchise can give you a leg up. With a franchise resale, you’ll step into a business with an established foundation, loyal customers, and proven operational systems. However, this decision requires careful research, due diligence, and planning to ensure success. Ready to start your journey? Explore your options today with Franzy, and take the first step toward becoming a franchise owner!