Buying a franchise resale: what to check before you commit

A franchise resale is an existing franchised business, bought from the franchisee who runs it. The brand, the system and the supply arrangements stay the same. The owner changes.

It sits between buying an independent business and taking a new franchise, and it borrows risks from both. You are buying a trading business with its own history, and you are also stepping into a contract with a third party who has a say in whether the sale happens at all.

How a resale differs from a new franchise

| | New franchise | Resale | | --- | --- | --- | | Figures you rely on | The franchisor's projections and network averages | The unit's own accounts and trading record | | Income | Builds from zero | From the day you take over | | Price | The franchisor's initial fee plus set-up costs | Negotiated with the seller, reflecting goodwill and assets | | Term | A full new term | Whatever is left, unless the franchisor issues a new agreement | | Staff | You recruit | Existing staff usually transfer with the business | | Location and territory | Chosen with the franchisor | Already fixed | | Who you negotiate with | The franchisor | The seller on price, the franchisor on approval |

The central trade is evidence for money. A resale costs more than a new unit of the same brand because you are paying for customers, staff and a location that already work. In exchange you can check whether they do.

The other difference is less obvious. A new franchisee chooses the brand. A resale buyer chooses a particular unit, which may be one of the strongest in the network or one the current owner is leaving for a reason. Finding out which is most of the work.

Franchisor consent and approval

Franchise agreements almost always restrict transfer. The franchisor built the network and decides who joins it, and a sale to somebody it has not approved is normally a breach of the agreement.

Expect the franchisor to:

• Assess you as it would a new franchisee. Application, interview, financial checks and sometimes a discovery day. Your experience of running the independent business down the road counts for less than your fit with their system.
• Require training. Usually its standard initial training, completed before or shortly after you take over.
• Ask you to sign a new agreement. Some franchisors will not simply assign the existing agreement. They issue their current form, which may carry a different royalty rate, marketing levy, territory or term from the one the seller has.
• Set conditions on the seller. Settling any money owed to the franchisor, bringing the premises up to current brand standards, or completing a refit before approval.
• Hold a right of first refusal. Some agreements let the franchisor buy the unit itself at the price you have agreed. Check whether it exists and how long the franchisor has to exercise it.

Ask the seller early whether they have told the franchisor about the sale, and ask the franchisor directly how it handles resales. A franchisor that is supportive of the process makes it considerably faster. One that is not can stop it.

Transfer fees and who pays them

Most franchise agreements set a transfer fee, payable to the franchisor when a unit changes hands. It covers the franchisor's cost of assessing the buyer, training, and the legal paperwork, and it is set by the agreement rather than by any industry standard.

Two questions matter:

• How much is it, and how is it calculated? Find the clause and read it, rather than relying on what the seller remembers.
• Who pays it? The agreement may say, and even where it puts the fee on the seller, who ultimately bears it is a matter for negotiation between you. If the seller expects you to pay it, it is part of the price.

Add the costs that sit around it: training, any refit the franchisor requires, legal fees on both the purchase and the new agreement, and the working capital you need from day one.

The remaining term

A franchise agreement runs for a fixed term. Pinsent Masons notes that UK terms typically range from five to twenty-five years, with most lasting five to ten, and there is no statutory limit on length.

In a resale the remaining term is one of the most important numbers in the deal, because it limits how long you can earn back what you pay.

Check:

• When the current term ends. Two years left on a ten year agreement is a very different asset from nine.
• Whether there is a right to renew. And on what conditions: usually no breaches, a renewal fee, a refit to current standards and signing the franchisor's form of agreement at the time.
• Whether the franchisor will issue you a fresh term. If it will, the remaining term matters less. If you take an assignment of the existing agreement, it matters a great deal.
• How the lease lines up. A franchise that runs for eight more years in premises with a lease ending in three is a three year business unless the lease is secure. The due diligence checklist covers the property questions.

Reading the unit's trading history

The advantage of a resale is that you can test the numbers. Use it.

Ask for: three years of accounts for the unit, monthly management accounts, the royalty and marketing levy statements submitted to the franchisor, VAT returns, and the bank statements that tie them together.

The royalty reports are especially useful. The franchisee reports turnover to the franchisor to calculate the royalty. Those reports should match the accounts and the VAT returns. Where the three disagree, you need to know why before you rely on any of them.

What you are testing:

• Is the profit after all franchise costs? Royalties, marketing levy, required suppliers, technology fees and any contribution to national campaigns. Some franchisee accounts show these inconsistently.
• Is the owner's time costed? Many franchised units rely on an owner working long hours without a market salary. Adjust for what it would cost to replace them, as you would in any adjusted profit schedule.
• How does the unit compare with the network? Ask the franchisor for anonymised averages. A unit well below average may be fixable. A unit well above it may depend on the current owner.
• What is the trend? Monthly revenue over two years, not annual totals.

Staff will usually transfer with the business on their existing terms, as in any sale of a trading business. Our TUPE guide covers what that means.

Reading the franchisor's accounts

You are joining the franchisor's network as much as buying the unit. If the franchisor struggles, so will you, however well you run your site.

The franchisor is usually a UK company, and its filed accounts, directors, charges and filing history are free at Companies House. Look for:

• Late or repeatedly amended filings. Not conclusive, but a question worth asking.
• Charges over the franchisor's assets. Who has lent to it and on what security.
• Where its income comes from. A franchisor whose revenue depends on selling new franchises, rather than on ongoing royalties from units that trade well, has an incentive to grow the network faster than it can support it.
• Director changes. Frequent turnover at the top of a small franchisor is worth understanding.

Then talk to other franchisees. The franchisor can give you a list; find some yourself as well, including any who have left. Ask what the support is actually like, whether the numbers they were shown matched what happened, and whether they would buy in again.

The British Franchise Association

The British Franchise Association (BFA) is a trade association for franchising, established in 1977, with membership open to franchisors, franchisees, advisers and suppliers. It is worth understanding what it does and does not do.

What it offers. The BFA admits franchisors through an accreditation process against its Code of Ethics for Franchising, and has several membership levels depending on how established a franchise is. Franchisees of member franchisors can join free. It runs training through the BFA Academy, and it provides dispute resolution for members: informal conciliation, which is free for members, and access to mediation and arbitration.

What it does not do. The UK has no franchise-specific legislation, and there is no legal requirement for a franchisor to give a disclosure document. BFA membership is voluntary and the Code of Ethics is not legally binding on franchisors outside it. A franchisor that is not a member may be perfectly sound, and membership is not a guarantee of any individual unit's performance.

Use it as one signal among several. If the franchisor is a member, check which level. If it is not, ask why.

What to check in the franchise agreement

Have a solicitor who works on franchise agreements read the agreement you will actually sign, whether that is the existing one or the franchisor's current form. The clauses that matter most in a resale:

• Transfer and assignment. Consent, conditions, fees, right of first refusal, and what happens when you want to sell in turn.
• Term and renewal. Length, renewal rights and their conditions, and any renewal fee.
• Fees. Royalty rate and basis, marketing levy, technology or other ongoing charges, and whether the franchisor can change them during the term.
• Territory. Whether it is exclusive, how it is defined, and whether the franchisor can sell online or through other channels into it.
• Supply obligations. Required suppliers and whether the pricing is controlled.
• Brand standards and refits. When a refit can be required and who pays.
• Termination. The grounds on which the franchisor can end the agreement, and what notice and cure periods apply.
• Post-termination restrictions. Non-compete clauses on where and for how long you cannot trade in the same line of business after the agreement ends.
• Premises. Whether the franchisor or an associated company holds the lease, which gives it control over your site.

Then read what you are buying from the seller separately: the asset purchase agreement, the warranties about the unit's trading, and whether any money the seller owes the franchisor will be settled on completion.

Is a resale right for you

A franchise resale suits a buyer who wants an established operating system and a trading record, and who is comfortable operating inside somebody else's rules. It suits less well a buyer who wants to change what the business sells or how it runs, because the franchisor will not let you.

If that fits, a resale can be one of the lower risk ways into owning a business, precisely because the evidence is there to check. Franchise resales appear alongside independent businesses in the businesses for sale, and our guide to buying a business covers the process from search to completion.