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\u2019s no guarantee you\u2019ll 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.<\/p>\n\n\n\n
But what exactly is a franchise resale? And is owning an existing franchise business worth it? I\u2019ll answer both of these questions and more in this helpful guide on franchise resales.<\/p>\n\n\n\n
A franchise resale occurs when an individual purchases an existing franchise from a franchisee rather than the franchisor<\/a>. There are essentially two ways to buy a franchise<\/a>. 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.<\/p>\n\n\n\n For example, if you wanted to open a brand-new McDonald\u2019s, you would become a franchisee for McDonald\u2019s. But, if you are looking to purchase an established McDonald\u2019s franchise, you can also buy an existing McDonald\u2019s from the existing franchisee and become the new owner of the franchise. <\/p>\n\n\n\n Naturally, before buying a franchise resale, you\u2019ll 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:<\/p>\n\n\n\n Don\u2019t 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 \u2014 it\u2019s a very reasonable question, given the nature of the commitment.<\/p>\n\n\n\n Are you convinced that buying an existing franchise is the best option for you? While franchise resales certainly aren\u2019t 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.<\/p>\n\n\n\n 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\u2019t mean it\u2019s for everyone.<\/p>\n\n\n\n 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\u2019t just invest in a franchise resale for the money \u2013 you might find that your motivation and satisfaction start to wane regardless of your income.<\/p>\n\n\n\n If you\u2019ve decided that a franchise resale is the right investment for you, it\u2019s time to start shopping around. One of the most straightforward ways to find franchise resale opportunities is to research franchises using Franzy<\/a>.<\/p>\n\n\n\n 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.<\/p>\n\n\n\n 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<\/a> once you\u2019ve narrowed your potential choices down to a few.<\/p>\n\n\n\n First and foremost, when buying an existing franchise, it\u2019s 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\u2019s worth further investigation.<\/p>\n\n\n\n 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.<\/p>\n\n\n\n The Franchise Disclosure Document<\/a> (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\u2019s 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<\/a>, 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.<\/p>\n\n\n A clear, step-by-step breakdown to help you decide if franchising is right for you\u2014and how to get started.<\/p>\n\n\n\n\t\t\t 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.<\/p>\n\n\n\n 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\u2019s wasting their time.<\/p>\n\n\n\n As mentioned above, you\u2019ll 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\u2019ll be trusting you to protect and promote their brand.<\/p>\n\n\n\n Before you start to set your terms or find some wiggle room in the negotiating stages, you should secure financing for the franchise<\/a>. You\u2019ll need significantly less startup funds when purchasing an existing franchise since you won\u2019t 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.<\/p>\n\n\n\n Even if you have plenty of capital, it\u2019s worth securing financing in order to prevent risking such a major chunk of capital.<\/p>\n\n\n\n The good news is that there are many different forms of funding for franchise resales, including:<\/p>\n\n\n\n Remember: borrowing comes with risks, making it super important to do your homework before signing any contracts.<\/p>\n\n\n\n It\u2019s 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\u2019s well worth acquiring your own impartial appraisal just to be sure.<\/p>\n\n\n\n The valuation may vary depending on factors such as equipment, current inventory, assets, and any business goodwill (such as recognition of the fact you\u2019re gaining access to an immediate revenue stream). <\/p>\n\n\n\n You might also want to view the franchise\u2019s financial history to give yourself some extra negotiating wiggle room. While the IRS only suggests businesses store financial records for seven years<\/a>, many don\u2019t follow this recommendation. However, the current franchisee should be able to provide financial information for at least the past three years.<\/p>\n\n\n\nReasons Franchise Owners Sell Their Franchises<\/h2>\n\n\n\n
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How to Buy an Existing Franchise Business: Step-by-Step<\/h2>\n\n\n\n
Step One: Determine If a Franchise Resale Is a Good Choice for You<\/h3>\n\n\n\n
Step Two: Research Franchise Resale Opportunities<\/h3>\n\n\n\n
Step Three: Investigate Your Options and Conduct Due Diligence<\/h3>\n\n\n\n
Step Four: Read Through the FDD<\/h3>\n\n\n\n
Download the First-Time Franchisee Guide<\/h4>\n\n\n\n
Step Five: Meet With the Current Franchisee<\/h3>\n\n\n\n
Step Six: Get Approval From the Franchisor<\/h3>\n\n\n\n
Step Seven: Secure Financing<\/h3>\n\n\n\n
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Step Eight: Negotiate the Sale<\/h3>\n\n\n\n
Step Nine: Review and Sign the Franchise Agreement<\/h3>\n\n\n\n