Franchise Resales Could Be Your Best Route to Franchise Ownership. Here's Why. Stepping in to run a business that's already producing cash flow may be a better fit and less risky for many prospective franchisees.
By Alicia Miller Edited by Chelsea Brown
This story appears in the June 2023 issue of Start Up.
When most people think about buying a franchise, they imagine opening a brand new one: new location, new staff, new everything. But if you want to be a franchisee, don't forget that you can also buy an existing franchise location from a franchisee who's looking to sell — and it might end up being a better deal.
When you start a franchise from scratch, there are lots of unknowns. Will the concept resonate? Will you find a good location? You must hire and train an entire team. The whole process can take up to three years to ramp up. But with a resale, you can tour an existing site or territory. You can assess existing marketing campaigns and spending and revenue. You can review multiple years of business results. You can even "mystery shop" and potentially meet the staff.
Related: Use This Checklist to Avoid Buying a 'Zombie' Franchise
This can be a lot — but it can also improve your chances of success. And if your goal is to own many units, don't forget that a resale franchise unit has existing cash flow. That can help you either acquire more units or build out new ones much faster than if you had started from scratch.
So, how do you get started? Let's break it down.
Between 3% and 4% of franchise units were transferred in 2020, according to FRANdata's research. FRANdata forecasted that 2022 would end with more than 792,000 franchise units in the U.S. If we assume 3% to 4% will transfer again this year, that's 23,760 to 31,680 potential resales coming available. Many of those will end up as multi-unit acquisitions, especially in legacy systems. But there should still be a robust number of units available for you to consider.
Franchisees exit for many reasons: retirement, burnout, relocations, and changes in personal circumstances. In healthy franchise systems, the transfer cadence is relatively predictable, because it's tied to renewal schedules and lease expirations.
Related: What's Old Is New Again for These Two Resale Franchisees
As you examine resale options, make sure that system churn is due to normal retirements and not a red flag about system profitability. 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.
You can learn so much about a system by looking at resales. 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 they've had a positive experience as a franchisee), or only to new operators (who don't know the brand as well)? Are owners exiting after a long tenure with good cash flow, or soon after joining because it didn't work out?
Related: Preparation Is the Key to Franchise Resales
Large franchise systems often have well-established resale processes. (Though franchise salespeople usually earn a commission on new unit sales — so take their advice on resales with a grain of salt.) But smaller brands tend to take a while to handle transfers. Don't be put off if a younger system doesn't have a smooth resale program just yet. There are also business brokers in every community with franchise resale options. You can even approach owners directly.
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 — but corporate defensiveness about turnover is not. During mystery shops, I hear that "it was just a bad fit" more than 95% of the time. But if that's the case, it reflects poorly on corporate's approval process.
Focus on resales in strong systems and ensure fit. And if you can find it, then you've bought more than just a good opportunity: You've also bought a head start.
