12 Tips to Negotiating and Buying a Franchise Resale
Buying an existing franchise business can be a scary proposition. There are so many factors to consider and so many questions to ask that it can feel overwhelming, even within the safety net of a franchise system. The good news is that franchises change hands all the time, and there are simple tactics any buyer can follow to make the negotiation and buying process smooth and successful.
Our franchise buying and resale experts have compiled 12 essential tips that will help guide you to confidently negotiate a great franchise resale deal. But first, the most important step in the buying process: You must clearly know and state your unique goals and motivations for getting into business before you buy.
There are entire books written about life goals and business goals, so we’ll simply say that your big picture life goals are more important than the specific franchise you buy. Finding a franchise resale that fits into your unique life goals should be your overarching objective. You don’t want to make the mistake of being forced to make your life goals fit into the business you buy.
Fortunately, most good franchise concepts can be successful with a variety of individual goals and objectives. Chances are, there are a number of great franchise resales out there waiting for you. You simply need to make sure you don’t lose sight of what is most important to you as you go through the evaluation and buying process. Tips from our franchise buying and resale experts can help guide you
Now, let’s look at some practical tips to negotiating and buying a franchise resale.
1. Seek a “win-win” result from the beginning.
This should be the first and highest priority upon entering into any serious discussions with a seller. In fact, you should communicate this objective directly to the seller early on in the process and ask them to approach the deal the same way. A reasonable person, the type of person you want to buy a business from, will appreciate and most likely reciprocate this approach. The best path to successfully buying a franchise resale is a path that also enables the seller to get what they want. Remember, one-sided deals typically fail. Balanced deals get done.
2. Be sensitive of the time and confidentiality preferences of the seller.
Negotiating and buying a franchise resale is a process that doesn’t happen overnight. Some of that process involves you and the seller becoming comfortable sharing time and information with each other. Most franchise sellers don’t want to provide each prospective buyer with every detail of their business before having some degree of confidence that the prospect is a good potential buyer. Sellers may be willing to answer a few basic questions for tire kickers, but they want to reserve their time and sensitive business information for serious & qualified buyers. If you are a serious buyer, don’t be put off if the seller is hesitant to provide you with deep insight into their business early on in the process.
3. Be willing to put enough skin in the game.
This is an important factor to sellers and it motivates them to work with you in completing a deal. While you may occasionally find a distressed franchisee willing to sell their business for a song, most sellers will expect a qualified buyer to share the risk in the deal. A buyer expecting 100% seller financing is not a strong or attractive candidate to a franchise seller or a franchisor. Creating a win-win deal requires some give and take from both the buyer and the seller.
4. Ask the seller to finance a portion of the sale.
Seller financing keeps the seller engaged and motivated to see you succeed. It also lowers your risk. While most sellers are not eager to finance the entire purchase, oftentimes a seller is willing to finance 10%, 25% or even 50% of the deal to get it done, especially if they believe you are seeking a win-win deal. Don’t be afraid to ask the seller to finance a portion of the deal when you are buying a franchise resale.
5. Investigate the franchisor and understand their approval and training process.
Do some basic research on the franchisor to make sure you like their mission and reputation before you get too deep into negotiations. You will also have an opportunity to visit the franchisor in person at a “discovery day” and talk with them in detail well before you close the deal. Our expert franchise buying and resales advisors recommend you coordinate the timing of this process with the seller. Keep in mind that franchisors will also have a vetting process in which they will need to approve you as a franchisee. They will want to have reasonable assurances that you are a good fit for their franchise system and will be able to continue to operate the franchise. The franchisor will also have training requirements that you will need to meet as part of their approval. The bottom line is buying a franchise resale requires more than just an agreement with the franchisee.
6. Look for a history of successful resales within the franchise brand.
Some day you will want to cash out of your franchise. In fact, this certainty should be considered and planned out before you even buy a franchise resale. Ask the franchisee and franchisor about recent resale deals and learn as much as you can about them. If franchisees are unable to sell their franchise resale when they are ready to move on, is this a business you want to invest in?
7. Understand the Franchise Agreement and be aware of the franchisors first right of refusal.
Before you get too far down the road with a seller, it is important to review the rights, options, and fees that the franchisor may exercise upon a transfer. Approving the deal, transfer fees, first right of refusal, and other critical information should be reviewed in the seller’s Franchise Agreement. Although it is typically unlikely that a franchisor would exercise their first right of refusal, many maintain the right to acquire a franchise for the same terms offered by another buyer. Franchisors will also need to approve you or any other buyer. It is better to determine early on if any of these factors could cause challenges in closing the deal.
8. Negotiate a reasonable transition period with the seller.
In most cases you will want the seller to be readily available and/or to stay on board for a period of time to ensure a smooth transition and provide hands-on training. The seller will likely be eager to move on to their new endeavors, but you may need several weeks to several months of the seller’s training and assistance. An owner-operated franchise may require quite a bit of time and effort from the seller during the transition period so that you can be introduced to customers and vendors and learn the details of the business. Before buying a franchise resale, you will need to determine and negotiate a transition period that is adequate for your success yet reasonable for the seller to provide.
9. Know and preserve the key employees.
It is critical to establish reassurances that key managers and key employees will remain with the company after the sale. These individuals can even be listed in the Purchase and Sale agreement. Before buying the franchise, ask about the key people to help you understand their history with the company and their motivation for working there. Once you purchase the franchise it is important to reassure them of your intentions to help them continue to be successful and satisfied in their work. Transitioning to new ownership can be a scary process for employees and you don’t want them to start looking for a new job the day they hear of the change in ownership. You may want to negotiate to have the seller offer additional support or an extended transition period if a key person is lost shortly after the transfer of ownership.
10. Make sure there is a written non-compete agreement with the seller(s).
The last thing you want to do is buy a franchise resale and then have the seller take the customer lists and trade secrets and compete with you. While you hope this would never happen, it can. You should understand and be comfortable with the seller’s plans and intentions after the sale takes place, and then have an attorney draft a comprehensive non-compete agreement between you and the seller. Additionally, the franchisor may require the seller to sign a non-compete agreement upon transferring their franchise rights to you, but don’t expect or rely upon the franchisor to enforce a non-compete. Franchisors don’t like to have a history or reputation of suing their former franchisees, even if it is justified, nor are they eager to invest time, money, or resources into these types of matters.
11. Ask the franchise seller to provide performance and key metric reports.
In addition to reviewing the standard financial documents such as tax returns, P&L’s, and balance sheets, most franchise organizations provide important reports and/or critical data to franchisees regarding their individual operation. Ask the seller about the key metrics in their business and have them provide reports and data on these metrics so you can review them in detail. This will give you insight into some keys to success in a particular franchise system, as well as identify areas of opportunity for improvement. Be sure to ask the franchisee for a report that shows their gross receipts and royalties paid. Since franchisees often pay royalties based on their revenue, this type of report should be readily available, and it typically provides an accurate reflection of actual revenue and the subsequent royalties paid.
12. Have a viable plan B so that you don’t feel forced into the deal.
Buying a franchise resale is a big decision. The ability to walk away from a deal gives you leverage and confidence. Whether your plan B is to simply wait for another deal in the future or to move forward with another deal now, it’s better to be in a position to choose from the best of multiple options than to be stuck with only one option. Don’t be afraid to consider more than one franchise resale at a time.
You, like so many others, are on the way to realizing the first half of the American Dream… owning your own successful franchise! While we’ve provided you with our top tips on how to negotiate and buy a franchise resale, there are many other great pointers to consider as well. We encourage you to continue to learn more about negotiating and buying an existing franchise so you can get a win-win deal done. You will find our article “The 3 Types of Franchise Resales” helpful in your learning process, and we encourage you to read this if you haven’t done so already.
Franchise Flippers is the premier franchise resale marketplace and resource center. Our franchise resales experts are dedicated to helping franchise buyers and sellers get win-win deals done. Visit us at www.franchiseflippers.com and learn how we can help you.