WHAT YOU SHOULD KNOW ABOUT BUYING A FRANCHISE RESALE
March 14, 2022
Buying a franchise resale is a popular way to become a business owner in the United States. A franchise resale is buying an existing franchised business that has been owned and operated by a previous franchisee. According to the International Franchise Association (IFA), there were an estimated 780,000 franchise establishments in the U.S. in 2021. A significant number of those are available for resale at any time.
There are many things to consider if you are considering buying a franchise resale. Buying a franchise that was previously owned and run by another franchisee has its advantages—and its disadvantages. It is vital to understand franchise laws and regulations, as well as the usual legal issues involved in purchasing any business, when purchasing an existing franchised business, which is why you’ll need to consult with a franchisee attorney.
At Bundy & Fichter PLLC (formerly Bundy Law Firm PLLC), you’ll receive detailed assistance from franchisee attorneys based in Seattle, Washington. Bundy & Fichter PLLC proudly offers legal guidance to franchisors and franchisees throughout the country, including Oregon, Texas, and Florida.
Buying a Franchise Resale
As its name implies, a franchise resale refers to the process of buying an existing franchise business from a previous franchisee. There are benefits to buying a franchise resale. Instead of starting a franchise business from scratch, purchaser is buying a business that has already been established. This can reduce the amount of work, time, and money necessary to start and run your new business.
Steps in the Franchise Resale Process
The process of buying a franchise resale involves many steps, including:
The franchise purchaser finds a franchised business that is a good fit for their budget, interests, background, and financial goals. Once you find a franchised business for sale that might be a good fit, you need to immediately consult with a franchise attorney to insure that, from the start you are getting the best possible price and terms.
The franchise purchaser consults with a franchise attorney. You should consult a franchise attorney very early in the process and before you agree to any terms of the deal. You generally are better off to not even sign a “letter of intent” or similar document until after you have consulted a franchise attorney.
The franchise purchaser analyzes the franchisor. Once purchase a franchised business, you will be subject to the rules and regulations imposed by the franchisor. Thus, it is crucial to analyze the franchisor learn more about their rules and regulations. An experienced franchisee lawyer can help you in that process. We recommend you get as much information as you can about the franchisor before you go farther than a letter of intent with the seller.
The franchise purchaser reads the franchise agreement and franchise disclosure document (FDD). When buying an existing franchise business, just like if you were the original investor in the franchise, you must read and sign several documents, including the franchise agreement and the FDD. Do not take this step lightly. Read the documents carefully. Write down your questions and concerns. Have your franchisee lawyer review all of the documents and explain to you the legal and business aspects of the franchise and the franchise relationship.
The franchise purchaser obtains and reviews the franchise seller’s financial statements. It is equally important to review the franchise seller’s financial statements for the business you are considering purchasing to ensure that the business is profitable and a worthwhile investment.
The franchise purchaser performs a valuation of the franchise business. When buying a franchise resale, you need to understand the value of the business you are considering purchasing. Do not take the seller franchisee’s word for that value. Do not take the franchisor’s word. Take the seller franchisee’s financial documents, including at least three years of federal and state tax returns to an accountant or valuation expert you select and obtain an independent review. To reach a true value, you also need to understand why the seller is selling. If it is because the business is not profitable, proceed very very cautiously. Businesses rarely do better after a sale.
The franchise purchaser proposes a purchase and sale contract to the franchise seller. After you have completed your review of the franchise and franchisor, you should have your franchisee lawyer prepare a contract for you to purchase the business. Do not rely upon forms obtained from the Internet or provided by the franchisor or a broker. Those are much too generic and will not give you the legal protections and rights that you need.
The franchisor approves the transfer. Most franchise agreements provide that franchisors have the right to either approve or disapprove the transfer of the franchise business from a previous franchisee to a new franchisee. You must not skip this step. Be sure you and the franchise seller take the required steps to obtain approval. The franchisor will probably require you to fill out forms and take other steps before the transfer is approved. Do not write a check for the business or waive a contingency in the purchase agreement until you have the franchisor’s approval in writing.
The transfer fee gets paid to the franchisor. In most cases, franchisors require either the seller or purchaser of a franchise resale to pay a transfer fee. Who pays should be agreed in the purchase agreement your franchisee lawyer prepares.
The skilled lawyers at Bundy & Fichter PLLC help potential franchisees and franchisors at every step of the franchise resale process.
Potential Pitfalls When Buying a Franchise Resale
Buying a franchise resale can be a daunting process that involves many potential complications. Some of the most common pitfalls that a franchisee may encounter when buying an existing franchise business include:
The franchise business is not worth the investment. Often, franchisees sell franchises because the business incurs significant or unexpected expenses, cannot generate sufficient revenue, or is otherwise not profitable. For this reason, it is critical to perform a thorough evaluation of the franchise business and review its financial statements before you even sign a contract for a franchise resale. Most people do not sell businesses unless the business is less profitable than they expected, there is some problem in the relationship with the franchisor or there is a family crisis. Find out what is the real motivation for sale and examine it closely with your franchisee lawyer and other advisors.
The franchisor does not approve the transfer. Failure to obtain approval from the franchise company is a potential pitfall that many franchisees overlook. If you write a check for the business before the franchisor approves and that approval does not follow, you may be unable to get your money back. Be careful.
The franchise purchaser skips due diligence. Due diligence is one of the most important steps to take when buying a franchise resale. The process we have described above is a brief outline of what the term “due diligence” means. Thorough due diligence, in consultation with your franchisee attorney and other advisors will help you know whether purchasing the franchise resale is a good decision for you and your family.
Let Bundy & Fichter PLLC Help You
Buying a franchise resale involves many potential issues that need to be addressed. If you are considering purchasing an existing franchised business, reach out early to a skilled franchisee attorney to understand your unique situation. At Bundy & Fichter PLLC, experienced attorneys can help guide you through the franchise resale process, no matter where you live in the U.S. Contact them in Seattle to get started.