How to Buy a Franchise for Sale: A Franchise Chatter Special Report (Part 1 of 5)

Buying a franchise that has been in business for several years is a very popular option among prospective franchise owners.  Google gets over 40,000 global monthly searches for versions of  the phrase “buy a franchise” and over 60,000 for the phrase “franchise for sale”.  Because of the popularity and richness of this subject, I’ve decided to write a more in-depth report on the topic and publish it in 5 installments.

When I decided to pursue the Mailboxes Etc. (now The UPS Store) franchise opportunity, my first choice was to buy an existing store.  But at that time, none of the stores in San Francisco were for sale.  I even considered buying a well established local mom-and-pop shipping and mailbox store  in my preferred neighborhood with the intention of converting it into a Mailboxes Etc.  Unfortunately for me, the owner was not interested in selling.

So while I never actually bought an existing franchise, I went through the entire process of investigating various franchises for sale.  This report summarizes what I’ve learned from that experience and contains the same advice I’d give any friend or family member who is considering buying an existing franchise.

1.  Weigh the Advantages and Disadvantages of Buying an Existing Franchise versus Opening in a New Location

Pros. The following are what I consider to be the main advantages of buying an existing franchise:

• The buyer gets an immediate and predictable stream of revenue and cash flow from day one because the existing store already has a regular customer base in the neighborhood.

• It’ll be much easier to make financial projections for any business plan, whether the purpose of the plan is to gain financing from a bank or simply to set a road map for future growth.   The actual revenue and profit figures from past years can be used in the financial models for budgeting and planning purposes.

• The new franchisee is spared from having to build out a store from scratch (and all the headaches that come with it).  The new owner can focus his or her efforts on the more enjoyable aspects of running a business:  things like strategic planning for future growth, marketing, customer relations, and general day-to-day operations.

• Generally, a well established franchise concept will have an existing store in almost all the best locations and territories, and existing owners are given first priority in opening new stores.   Buying an existing store gives the new franchisee a chance to enter the franchise system with a good location in an established neighborhood.

Cons. The following are what I consider to be some of the disadvantages of buying an existing franchise:

• Buying an existing franchise that is profitable is usually more expensive that opening a new store in the same location.  The selling price is either a multiple of annual sales (usually 1x annual sales) or a multiple of the owner’s cash flow (usually 2-3x annual owner’s cash flow).  Opening a new store involves spending for the build out, equipment and other start-up expenses. This amount is usually less than the asking price of an established, profitable store.

• There’s always the risk that the seller overstates the revenues and profits of the store or fails to disclose material hidden problems or risks associated with the store, the lease, the location, among others.

• There’s also a slight risk that some of the customers loyal to the previous owner will take their business elsewhere, or some of the key employees will resign.   But this is relevant only in a few  industries where most of the revenues come from a few big accounts, like a printing franchise, for example.

2.  Research Existing Franchises for Sale Using Multiple Channels

• Your starting point should always be the franchising company’s website.  Some franchisors prohibit their franchisees from listing their businesses for sale in any other venue.

• You should then expand your search to websites that specialize in listing small businesses for sale.  You’ll surely find a lot of existing franchises among the listings.   Some of the listings will not actually state the name of the franchise, so you’d need to do some guesswork.  (For example, Subway prohibits its franchisees from stating in ads that the business for sale is a Subway franchise.  They can say “leading sandwich franchise” or similar wording instead.)  A few of the websites that I find useful are:

1. www.bizbuysell.com – with over 45,000 active listings, you can refine your search by revenue, cash flow, asking price, availability of seller financing, date of posting, among other criteria.
2. www.businessesforsale.com – with 54,701 listings at the time of this writing, they have separate sites for the US and 15 other countries, including Canada, Mexico, Australia, UK, and India.
3. www.bizben.com – focusing exclusively on businesses for sale in California, they add over 200 listings daily and currently have over 7,000 small business listings.

• Finally, you should consider whether you’d benefit from working with a business broker.  Many of the website listings are posted by brokers, so you can call them to discuss that particular listing or any others they may have.  A good broker will also alert you to other businesses that have not yet been listed.  Many brokers will even approach the owner of a specific business you are interested in to see if the owner is willing to sell.  A business broker is usually paid by the seller (generally a 10% -15 % commission based on the final selling price).  But under certain situations, the buyer may have to pay the broker’s fee if the latter performs additional services such as pursuing a business not currently for sale.

To be continued…

Click here to read Part 2

Click here to read Part 3