Pros and Cons of Buying a Franchise from a Franchisee

When buying a franchise there are many options. One option to consider is whether to buy and develop a new franchise, or to buy an established franchise from a franchisee. According to Entrepreneur.com, 10 to 15 percent of franchise sales may actually be buyouts of previously owned franchises. Even so, there are benefits and detriments to such a transaction, and it is important to understand both before making a decision.

Making the Purchase

Buying a franchise from a franchisee is often a more complicated and precarious process than buying straight from a franchisor.  With a business transfer, you are buying an existing business with operational history which may be either good or bad.  Additionally, the franchisor usually must approve the purchase, and the previous owner’s motive to sell may be unclear.  You’ll have to do more research to evaluate the merits of the specific business opportunity as well as the pluses and minuses of the franchise system generally.

Pro: An existing franchise has financial documents based on actual performance and a reputation within the community, the franchisor, and among other franchisees. These are all great sources of information to help you evaluate the business and business owner, and none of these is available when buying a new franchise.

Con: The owner probably knows something you don’t. Their business may not be doing well, or they may have inside information that makes them want to get out now. Sellers may not be legally required to provide complete financial reporting, and prospective purchasers should be wary of any transaction in which at least two years of financial data are not provided.  Some franchisors will give you the reports they have received for the business, but this isn’t common,  Be careful, as the information that is volunteered may only present the positives of the business.

Getting Started

The most glaring difference between buying a new franchise and buying an existing franchise is the level of business development.  Again there are plusses and minuses.   The market of an existing franchise may already have been developed or destroyed, and the location is already set.  The existing owner will have already built and equipped the business, and often the premises are offered at a discount from the original cost.  It is almost always more expensive to build out a new location than to purchase an existing one, (often with extended payment terms).  Be sure to learn if equipment upgrades or remodeling is required of the new buyer.

Pro: Forbes lists location as one of the Top 5 Things That Make a Franchise Successful. With an existing franchise, you won’t have to do any location scouting or much construction either, for that matter. The location will likely already have a client base, a list of vendors, and processes in place. This means you can begin doing business immediately, whereas a new franchise might not be ready to open its doors for a year or more.  Caution: all buyers need to evaluate the location. With a transfer you have data to help you identify the strengths and weaknesses of any given location.

Con: If you want to build your business from the ground up, this is not the option for you. In addition, you may be finishing out the previous owner’s contract, so if the business has been around for a while, you will have less time to operate it before needing to re-sign.  Most franchisors will require you to sign the newest version of the franchise agreement and not benefit from the seller’s existing contract.  In all circumstances a buyer should seek a full term and standard renewal options, so you can fully benefit from your investment.

Staffing

When you purchase an existing franchise, you can choose whether to keep the existing management and employees or hire your own staff. Most employees want to keep their jobs, and sometimes the previous owner will encourage you to allow them to or even write it into the sales contract. Either way, a thorough understanding of the existing team and their training is imperative.

Pro: You don’t have to train completely new staff members. The existing team may already function well together, and has experience running the business. If you lose staff during the change of ownership or choose to let some employees go, there will still be veterans on your payroll who can help train new staff and pick up the slack while new hires gain experience.

Con: There may be training procedures in place that don’t work or a dysfunctional team. It can be difficult to earn the trust and respect of employees if your first actions include letting people go or throwing out the employee handbook.

At first glance, buying a franchise from an existing franchisee may seem easier than starting from scratch, but it comes with its own set of challenges. The best way avoid the unexpected is to ask a lot of questions and do your own research about the franchise owner, their franchisor, and the business itself before signing a contract.  Start your search for an existing franchise for sale in the AAFD Marketplace.  The AAFD has partnered with BizBuySell.com, which provides prospective purchasers with thousands of existing franchised businesses for sale nationwide.