Entrepreneur’s Journal: Jumpstarting things by purchasing an existing franchise
Posted by: in Small BusinessFiled under: Small business
A franchise can be a great way to start your entry into self-employment — and strong income. Yet, there are still risks — such as with site locations and hiring employees — and lots of upfront costs.
But there’s another approach; that’s, purchasing an existing franchise (which is known as a “resale”). What are some things to take into account? Well, let’s take a look:
Track Record: With some due diligence, you can determine whether a franchise is successful or not. Besides getting the financials, you can talk to customers as well as vendors.
Turnaround: What if the franchise is failing? Yes, this can be an chance to get a business on the cheap. But, of course, this can be risky. Do you’ve the expertise to make the changes to get the business on track?
Keep in mind that turnarounds are often much tougher than you might anticipate.
Valuation: It’s likely that the franchise owner will be running various personal expenses through the operation. Thus, as much as possible, try to exclude these items. The goal is to come up with the real profitability of the company.
Next, you need a way to value these earnings (assuming you think they have the ability to continue). This is usually done by applying a multiple. For example, a Subway may fetch 4 times cash flows.
Where do you get these multiples? Well, there are some books on the topic, such as The Business Valuation Book 
Finding Franchises: There are many websites where you can find franchises for sale. One good resource is BizBuySell, which has an extensive directory.
Fees: There might be a transfer fee (which could be hefty). So, early in the process, get the franchise agreement. And, of course, it’s a good idea to have an attorney help out with things.
Tom Taulli is the author of various books, including The Complete M&A Handbook
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