Buying an Existing Franchise Business
Buying an existing franchise is often a safer and faster way to acquire a franchise than buying franchise rights for a new location or territory. The owner of an existing business may be ready to retire or move, or may want to sell for any number of other reasons.
A franchise owner who wants to sell his or her franchised business does so in the same way that any business owner sells a business. The buyer must do the same due diligence. The buyer of an existing franchise can examine the financial statements of an actual business and buy a known income stream. The employees are already in place and trained, and there is usually no need for a ramp-up period before the business is profitable. Due diligence of an existing business gives a clearer picture of the business than the contents of a franchise disclosure document give for the opening of a franchise at a new location.
But the buyer and seller must be mindful of the franchisor’s rights under the franchise agreement. The franchisor has the right to determine whether the buyer is qualified to be a franchisee in the franchise system. If the franchisor approves the buyer, then at the closing the buyer becomes the assignee of the franchise agreement or enters into a new franchise agreement.
Many franchise agreements give the franchisor a right of first refusal. A hopeful buyer may make a proposal, only to find that the franchisor has decided to buy the business.
Area developers and other multi-unit franchisees may also decide to sell the business. In these transactions, the franchisor generally has the same rights as in the sale of a single unit franchise.
Franchisors also sell their franchise systems. Franchise agreements typically give the franchisor the right to sell the entire business. When that happens, the franchisor notifies the franchisees that it is under new ownership. The buyer assumes the franchisor’s obligations under the franchise agreements. A strong buyer can bring money, management depth and strategic relationships that the selling franchisor lacked, although not all franchise buyers fit this description.
Franchise systems can be sold under a wide range of circumstances. At one end of the spectrum, the franchise system might be sold in the context of the franchisor’s bankruptcy. At the other end of the spectrum, a strategic investor or venture group may see an opportunity to strengthen and grow the system dramatically.