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Franchise Resales Part II - Due Diligence Tips

Written by: Rick Bisio

Article Overview: This is the second of a two part series dedicated to helping people better understand the give and takes of investing in a franchise resale.

Franchise Resales Part II - Due Diligence Tips

Purchasing an existing franchise will give you a concrete franchise education! Here is a primer on how to go about viewing an existing franchise:

1. Be discreet. Most sellers will not broadcast that the business is for sale. This is beneficial for you, and for the seller. Selling a business requires time, and it is in everyone’s best interest that employees and customers don’t spend time worrying about “what ifs.”

2. Study the franchisor. Do this exactly as you would if you were interested in buying a new franchise. Do this first - before spending time investigating the existing franchise unit. Remember, you will be signing a multi-year agreement with the franchisor, not the seller. You need to like the business and believe that you and the franchisor will work well together. See chapters 10-12 of the franchise book The Educated Franchisee for specific steps to take in evaluating the franchise opportunity.

3. Meet the Owner. When you are satisfied that the franchise fits your skill set and can fill your financial and lifestyle needs, make an appointment with the owner of the franchise unit you are considering. You will need to gather a lot of franchise information, including why s/he wants to sell, and you’ll want to examine the history of the franchise’s financial performance. The seller should provide balance sheets, income statements, tax returns and other financial statements. Check them with the franchisor to see how they match up with other franchisees’ figures. Find an accountant experienced with this type of business who will look over the figures as well. This information will be critical to your decision and will obviously be a determining factor in arriving at the price you will offer.

4. Call Other Franchisees. It is unlikely the selling franchise owner will tell you the downsides of the business. You will have to do your due diligence to determine if there are internal or external problems that make the business unsuitable. Talk to other franchisees to get a feeling regarding their level of success and then apply what you have learned to the local franchise you are considering purchasing.

5. Explore External Changes. You might also need to pay a visit to Town Hall and ask if any large projects are slated for the area where the franchise is located. These types of projects can be positive or negative. You need to know what is happening in the area where the business will be and be comfortable that any changes that may happen.

6. Find out About the Employees. If you are pleased with the answers you get to the above queries, move on to questions about employees. What are their salaries? What hours do they work? Are they skilled? Are they likely to stay on? Are there any employment contracts or understandings, salary disputes, etc. outstanding?

7. Study the Physical Plant. If things are going well, inquire about location and equipment, which will further assist you put a value on the business. You want to know the status and terms of the lease, the temperament and availability of the landlord, and the value, age and condition of all equipment and vehicles.

To guarantee purchasing an existing franchise will be successful, you must do your research. Make sure you like the business model and the franchise management team. Be certain you’ll like what you’ll do each day. Understand the financials. Hire experts to help you in your evaluation. Dig deep for information within the company and within the community. And remember that buying a business is a negotiation. Make sure the price is fair and that you have the skills to make the business a great success.

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Article Tags: accountant, appointment, balance sheets, best interest, due diligence, financial performance, financial statements, franchise education, franchise information, franchise opportunity, franchise owner, franchise unit, franchisee, franchisees, franchisor, income statements, selling a business, skill set, spending time, tax returns



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