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Franchising can be a great way to get into business ownership. Look for a proven operating system, strong unit-level profitability, a great management team, differentiated and valuable product/service offerings and satisfied franchisees.
Most people who think about starting a franchise business end up looking at new unit development. That’s because most franchise opportunity marketing is geared toward selling new units. You may not even think about buying an existing unit or group of units. But if you’re considering starting a franchise business, then resale options should absolutely be on your radar. Remember that resales can also be combined with new unit development! So, it’s not a case of “either/or” (new OR resale) but could be “yes/and” (new AND resale) for the right buyers.
Why you should consider resale options
Assessing resale options is a great way to understand the value potential of any system you’re considering. What do units sell for when owners retire? Is the brand too young to have much of a resale history? Are resales going to existing owners who want to expand (because their experience as a franchisee is positive), or only to new operators (who don’t know the brand as well)? Are owners exiting after a long tenure with a history of good cash flow, or soon after joining because it didn’t work out? You can learn so much about a system by looking at resales.
Second, stepping in to run a business that’s already producing cash flow may be a better fit and less risky for many prospective franchisees. That existing cash flow can help you either acquire more units or build out new units much faster than if you had started from scratch. With a resale, the business is already operating. You’ll have a much better sense for the potential of the business, competition and areas for improvement.
You can tour the site or the territory. You can mystery shop and potentially meet the staff. You can assess existing marketing campaigns and spending and the impact on revenue. You can review multiple years of business results, including what happened during the pandemic. When starting a franchise from scratch, you can never be sure whether a concept will resonate or whether you’ll be able to find a good location. You also have to hire and train your entire team. It may take up to three years to fully ramp up a new franchise unit. Yes, walking into a going concern is a bit like drinking from a firehose, but if you assess the business carefully and you’re confident about the existing team in place, you can get off to a fast start.
Things to keep in mind
Keep in mind that franchise salespeople earn commission on new unit sales, usually not resales. Keep their incentives in mind if they give you advice. Large franchise systems usually have strong resale programs and well-established processes. But it often takes smaller brands a while to handle transfers in a coordinated way. Don’t be put off if a younger system doesn’t have a smoothly operating resale program just yet.
There are business brokers in every community with franchise resale options. You can also approach owners directly and let them know you’re interested. Especially if you’re solely focused on resale opportunities and tell them so, they won’t see you as a threat and thus may be willing to share information about the franchise that can help you decide whether to keep looking within that system or consider other options.
Between 3-5% of franchise units are typically transferred every year. FRANdata forecasts that we ended 2022 with 792,000 franchise units in the U.S. If we assume 3-5% will transfer again this year, that’s 23,760 to 39,500 potential resales coming available. Not all of those will transfer, of course, and many will end up as multi-unit acquisitions, especially in legacy systems. But it still suggests there should be a robust number of units available from retirements as an option for you to consider.
Franchisees exit for many reasons. Retirement, a desire to monetize their years of hard work, burnout, relocations, illness, change in personal circumstances, etc. are all drivers. In healthy franchise systems, the transfer cadence is relatively predictable because it is tied to renewal schedules and lease expirations. There are only surprises if unforeseen personal circumstances prompt an exit. Unfortunately, for other brands, profitability issues drive churn. As you examine resale options, make sure system churn is due to normal retirements and not a red flag about system viability.
Finally, as you’re talking through resale options, listen closely to what the corporate team says about the exiting franchisee and the reasons for system turnover. Turnover is natural in a franchise system. Corporate team defensiveness about turnover is not. It’s incredibly bad form to blame turnover on franchisees, yet during mystery shops, I hear “it was just a bad fit” more than 95% of the time. Keep in mind that the corporate team has the final say on who is allowed into a franchise system. If it truly is a case of bad fit, it reflects badly on corporate’s approval process.
Speak to as many franchisees as possible to understand whether they are growing and investing in expansion units, including resales. Try to talk to other owners who have acquired resales in that system. Did the business meet their expectations? Have they gone on to expand further in new units or other resales? How did they start strong and maintain early momentum?
You may find the route to business ownership has been partially paved by an entrepreneur in your own community. They are ready to retire and looking for someone like you to take the reins of the business.