How to Buy a Franchise For Sale by Owner
6 things you must know when buying a franchise for sale by owner
If you are in the market to buy an existing franchise, you will likely come across a franchise for sale by owner as you search for the right business to buy.
Working with a professional when buying or selling a house, a car, or a business certainly has its benefits. However, just as with houses and cars, not all franchise sellers wish to utilize the expertise of a professional business broker, and decide to list on their own.
Why do some opt to sell their business on their own? A franchise owner may be testing the market to see if they get any bites. Maybe they are feeling lucky? Sometimes they aren’t so lucky and the current value of the business is simply not enough to pay a broker and leave the franchisee with the proceeds they require. Also, many brokers have a minimum commission of $10,000 or $20,000 or more. In other cases, a broker may require up front fees that the franchise owner simply can’t afford.
Minimum commission and upfront fees are not unusual when working with a broker. In fact, they are perfectly reasonable for the amount of effort and expertise a good business broker can bring to the table, especially for a well established and highly profitable franchise operation. However, for a smaller franchise operation that is yet to generate consistent profit, or that isn’t worth at least several hundred thousand dollars or more, using a business broker may not be the best option to market a business.
Whatever the reason may be, as a franchise buyer, there are 6 important tips to be aware of when buying a franchise for sale by owner.
1. Respect the confidentiality of the seller.
While some franchise sellers may not be concerned with their employees, customers, competitors or franchisor knowing their intentions to sell their franchise, many will want and need to be discreet. As an honest franchise buyer seeking information, this can be frustrating. However, it is important to be patient in your initial conversations with the seller as they grow comfortable with you and your willingness to maintain confidentiality. If you are serious about a particular franchise for sale by owner, be prepared to sign a confidentiality agreement. Understandably, the seller may request it before providing you much information.
2. Ask the right questions.
There is no end to the many questions you can ask about a business for sale. First, establish the most important big picture questions so you can determine if the business is a potential fit for your goals and start with those questions. Early conversations should not include questions about the details of the business operation. You may be curious about these details, but they are not important yet. Your specific questions will depend on what is important to you in your future business but a few examples of what to ask a franchise seller may be as follows:
- How much time do you (franchise owner) spend in the business each week?
- What is your role in the business?
- How is your relationship with the franchisor?
- Why are you selling your franchise?
- What do you love about this business?
If you discover in the first 5 minutes that the franchise owner works 75 hours per week in a role that you hate, and he is selling because he doesn’t like his franchisor, then you have little reason to waste your time, or the seller’s time, asking more questions. Start looking for your next franchise opportunity.
3. Understand the owner’s true benefit from the business.
As part of your due diligence, you will review the tax returns and income statements for the business, but these documents will not give a complete picture of what the franchise owner actually takes from the business. What the owner takes out of the business is called Seller’s Discretionary Earnings (SDE). For example, retirement contributions, health or disability insurance, personal vehicle expenses, etc.
A “for sale by owner” franchisee may not provide this information, so asking questions about discretionary expenses that are run through the business will give you a better understanding of the true benefit the owner is receiving from the business.
4. Research the franchisor.
As you may already know, buying a franchise involves another “partner” whom you must trust, understand, and work with. As a new franchisee, you will rely heavily on the training, culture, system, and vision that the franchisor provides, even if you are buying an existing franchise operation. The seller may not accurately depict or embrace these important factors, yet it is essential to understand what the franchisor requires and offers.
Make sure you understand what the seller has disclosed to the franchisor about their plans before you discuss anything specific with the franchisor. Also, be aware that the franchisor may guide you down a path to purchase a new franchise rather than the existing franchise you desire. In some cases, a new territory could be a better opportunity, however, don’t jeopardize the deal you are considering unless you have heavily weighed the decision.
5. Complete proper due diligence.
If you buy a for sale by owner franchise, you will likely not have a schedule or checklist of important due diligence items. A good franchisor may provide some assistance and guidance, and they can usually help to validate some important key metrics for the business, but you will need to make sure you don’t overlook important due diligence items before you close on the business. Many items need to be reviewed and verified such as tax returns, income statements, balance sheets, payroll reports, employee agreements, franchise agreement, lease agreement, customer lists and contracts, and more. There should be an agreed upon timeline in which these items are provided to you by the seller and a deadline for you to review and accept or reject them so that the deal can progress towards a successful closing.
6. Hire professional help as necessary.
Just because the seller has chosen to sell their franchise on their own it doesn’t mean you should not, or cannot, hire your own professional help. The franchisor will be involved, and can assist in getting the transfer done, but it may still be in your best interest to hire a buyer’s agent (broker) to represent you, or hire a lawyer to draw up the purchase agreement and review other documents.
Of course, this comes at an expense, and not every deal will require it, but making sure the deal is done properly and fairly is important. It is better to pay a broker and/or lawyer to help you do the deal right than it is to save a few dollars and not do the deal properly.
Whether you find yourself in the process of buying a franchise for sale by owner or you are buying a franchise marketed by a business broker, it is important to know and follow these 6 important tips. They will help guide you to completing a successful transaction.
Franchise Flippers is the leading resource for buying, building, and selling existing franchises. Franchise Flippers also hosts the largest exclusive franchise resale marketplace where you can find or sell your franchise resale. Check Franchise Flippers out at https://franchiseflippers.com/