Acquiring An Existing Franchise
On a daily basis I field calls from parties interested in buying a resale business. For the most part this is an attempt at risk mitigation, but the intent and the outcome are sometimes different . The key to success is having the right plan!
Let’s start with how most successful businesses get sold. When a business is clearly successful within a community and the owner is engaged with their town then the most common way that a buyer is identified is that they will first be a raving fan of the business then at some point will go whisper in the business owners ear “When you are ready to sell, call me”. This is sometimes the most targeted and easiest sale for the seller.
In some cases, though, the business is not an obvious success or does not happen to have the right raving fans that could be buyers. In this case the seller will resort to working with local business brokers or their franchisor to identify buyers. The franchisor side of that equation may be a great solution, but can take a little while as they may develop leads Nationally and you have to wait for a buy candidate to come to them from your area. If your franchise company bring a buyer to the table they will often be financially qualified ahead of time and have been through introductory calls so that they have a working knowledge of the business.
Local business brokers are a very different equation. Many local business brokers operate in a very similar fashion to the real estate agent that sold you your home. They are incentivized to get you to a closing event but it does not matter what you buy or if you are a good fit for the role of the owner. They have no vested interest in the outcome. We have seen some outstanding local resale brokers out there but they often seem to be a rare find.
When a business owner calls a local resale broker an interesting chain of events seems to be replicated. The broker “Recasts” or creates entirely new financials so that you can “understand” the owners financial benefit. The intent is to clarify the financial benefit that the owner received in things they used as tax deductions or showed as business expenses, they are trying to justify the resale price so that you don’t expect to base it on what they actually reported as income.
The challenge that this brings up is that you need to both evaluate the quality of the business and the accuracy of the recast financials. We would always hope to see that the local business broker recast those financials in a accurate manner but have seen many circumstances where liberties were taken that presented a picture that may not be a proper representation.
Here is the real trap many people fall into:
They begin looking for resales of their dream brand, then after they look at the ones on the market, if there are any, they take their desire to buy and start looking at anything that local broker has for sale. It can be a buying frenzy of sorts where a buyer has made a decision to leave their job and they just want to get something, anything, done!
So, here is what happens when the seller calls the local broker. That local broker has a list, that list is made up of known and proven buyers that are financially capable of closing a deal fast if they like it. If those known buyers pass on the business for sale then the broker will offer it to leads that call them or advertise it on the Internet. Since local brokers tend to sign exclusive sale agreements (6 months is pretty common) then they are now motivated to move it to anyone that can buy before they lose their exclusive contract. If you wander in their door with some money to spend then they will work to make a match between your money and a business they have on contract, especially if their exclusivity expires soon.
So, what do you do?
Well, there are a few things to keep in mind:
- If you have identified a particular brand you like then start with the franchisor and make your desire for a resale known up front.
- Work with that franchisor to find out if you are a good match for the business in the first place!
- If the franchise company does not have any resales then you could get to know the local franchisees.Go introduce yourself and make your desire to buy an existing business known.
- If you don’t find something easily then contact someone like me.We are not local business resale brokers, we may know of resales in your area.
A thought on resales as a risk mitigation strategy:
Once you have sorted through the owners story and books (or recast books) then there are two areas I would suggest that you be very attentive to:
- The fact that a business did a certain amount of business last year does not mean that they will do the same amount this year.What if the seller was a very engaged owner and customers flocked to them because there were his friend?Will they still flock to you?Will that level of business remain, shrink, grow?
- Would you actually have less risk opening a new franchise location with a brand that you are a perfect match for using the same system as the successful owners in your area?Timeline might be longer and cost may be less but it would be yours.
There is a lot to consider. What is your success story? Let’s go find it!
George Knauf is a highly sought after, trusted advisor to many companies; Public, Independent and Franchised, of all sizes and in many markets. His 20 plus years of experience in both start-up and mature business operations makes him uniquely qualified to advise individuals that have dreamed of going into business for themselves in order to gain more control, independence, time flexibility and to be able to earn in proportion to their real contribution. Contact the Franchising USA Expert George’s Hotline 703-424-2980.