Franchise Council of Australia advise on buying a pre-loved franchise

Many people get into franchising because they don't want to set up a new business from scratch. The reasons are simple: a turnkey solution is provided with systems, products, branding and a loyal customer following. However, one of the hardest things is for people to choose whether to take all the risk and do all the hard work and start a new franchise or to reduce their effort and risk by taking over an existing franchise.

The rewards for your effort and the risk of starting a franchise from scratch can be fantastic. You learn so much in terms of choosing the right location, developing teams, developing your own leadership and management skills as well as building a business. In terms of resale the financial rewards can be even greater.

The flipside is that if you buy an existing business you'll be up and running in no time. The greatest benefit of taking over an existing franchise is straightforward: it's already in operation, saving you from location searches, and if the staff stay on, saving you from the stressful process of conducting interviews, hiring employees and training staff.

Supply contacts, arrangements and delivery schedules would be set up and systemised over years to suit the business. There would also be a loyal and established customer base. This then allows you to focus on working on your business rather than in your business.

The biggest challenge in buying a new or greenfield franchise is that you have no idea what your sales will be and whether those sales can sustain your rent, labour, cost of goods and the many other overheads.

The benefit of buying an existing franchise is that you will have a realistic snapshot of past sales and profitability. That said, you are not guaranteed to get the same sales or profit in the future; this is dependent on how you run your business, your management style, marketing activity, ability to build sales and customer loyalty, your ability to control labour, cost of goods, wastage, utilities etc. You should not purchase an existing franchise with expectations of an immediately booming business; that will come by getting in and working your business and fine tuning all the key elements of its operations.

If you buy an existing franchise you can avoid certain fees. In many cases you will enter into the existing franchise agreement which will come with the sale of the business. This is not a new agreement and this could be of great advantage to you, especially if the fees paid to the franchisor in the existing agreement are lower than those franchisees in new agreements would be paying. While you won't have to find the new franchise fee, you may have to pay a transfer fee.

When buying an existing business it is important to try and learn why the departing franchisee is leaving the business. Investigate the area the franchise is in. Do your homework on market trends and predictions. The actual purchase price for the existing franchise will be something the exiting franchisee determines (it is usually calculated on multiples of net profit which can range from three to six times net profit), or something the two of you negotiate and determine together.

Finally keep in mind that once you agree on it price it does not always guarantee you will get to buy the business. Nearly all franchise agreements give the franchisor right of first refusal when an existing franchise is up for sale, so the franchisor has the legal right to purchase the franchise before it is offered up for public sale. There is usually a window of time in which the franchisor must make this decision (if they're even interested in purchasing), so find out how long that window stays open.

By Tony Melhem - Deputy Chairman, Franchise Council of Australia

This article appears courtesy of Franchising Magazine