Purchasing an Existing Franchise

Investors seeking to start a business using the franchise model do so primarily for the convenience and support a franchisor offers. Another reason may be to take advantage of company financing of start-up costs and ongoing working capital. When buying a franchise, there is no need to reinvent the wheel as decisions about leases, locations, adverting, securing inventory etc., have been made for you in advance and have been modified through years of trial and error. It is hard to put a value on such business experience, however, the cost of not having to repeat the mistakes of others comes in the form of upfront and ongoing franchise fees, royalties, and goodwill. There is no doubt that buying into a franchise business is a time-tested successful way to efficiently open a business.

Rather than open a new franchise from scratch, franchisors may have turn-key franchises for sale. Investors wishing to purchase a franchise and build it from the ground up often overlook the fact that the company may have re-acquired the franchise. Over the years, oil change franchise giant Valvoline has re-acquired over 500 franchise businesses from franchisees for varying reasons. Purchasing an existing franchise business is literally “turn-key” and all an investor needs to do is write a check and go to work.

Why would a franchise offer existing franchises to new investors? Reducing legal liability and capital expenditures are the reasons most often given for re-franchising company stores. Selling corporate run franchises transfers risks to another party and get expenses off of the corporate books. Capital expenditures such as remodeling and updating equipment and technology will now be the responsibility of a franchisee. The franchisor is in need of liquidity for other purposes such as expansion or repurchasing the company’s stock. During economic downturns, a franchisor could re-franchise their inventory of company-owned stores to keep from going out of business. More and more franchises are re-acquiring and then re-franchising stores when a franchisee has run afoul of local laws. Failing to pay sales taxes and engaging in underpayment of employees violate most franchise agreements and allow a company to take control of an existing franchise as an on-going concern. These franchises can often be purchased quickly and at below-market prices.

In any event, it is important to understand a company’s true motives for offering a company store to a franchisee for purchase. This is where your franchise attorney can analyze the books to see if you are about to buy an albatross franchise that is hopelessly unprofitable. The prospects and earnings history of the franchisor must also be taken into consideration.

While purchasing an existing franchise may seem like a convenient way to put yourself in business, one should first examine the franchisor’s motives for selling. Keep your eyes wide open for opportunities where a franchisor is required to repurchase a franchise, such as is the case with Caltex where franchisees have failed a company audit and have violated local minimum wage laws. Purchasing an existing franchise at a deep discount could provide a franchisee with the operating margin needed to quickly turn a nice profit.