Second-hand business

In any established franchise network, there will be some franchisees who are looking to leave. The latest NatWest/bfa Franchise Survey reports that seven out of 10 franchises were bought as a resale in the last two years. Manzoor Ishani asks: is a resale worth it?

The first question to ask when looking at a second-hand venture is why an existing franchisee wants to leave the network. Franchisees leave for a variety of reasons – some wish to retire, some may feel that the business or the profits it generates are below their expectations, others may find that they have taken their business to a certain level and are not willing to commit the resources required to take it to the next stage, or some may feel that the business is more demanding than they had anticipated.

It is important to try and get to the real reason behind the sale. This means that you must fully investigate the business you intend to buy in the same way as you would if you were buying a non-franchised business. The books will have to be examined closely and searching questions will need to be asked, and you will have to press for answers if you think the seller is being evasive. If premises are involved, title to the premises lease, etc, will have to be fully investigated as will full details of all employees. Remember that in buying a business as a going concern the buyer will take over liability for employing all the staff including their employment history.

The prospective buyer will also need to satisfy himself that customer records are accurate, what the position is with regards to customer contracts and other obligations they will be taking on once the business has been taken over.

In addition to this, the buyer will also need to protect himself against liabilities of the business and ensure that the seller accounts for any money paid on account of contracts yet to be performed, such as part-payments and deposits. Furthermore, ensure you take good title to all the assets free from all borrowings, mortgages, etc. With a new business start-up, there will be nothing in the till on day one and the franchisee will have to build up their customer base and business from scratch.

The franchisee will also have to rely on their franchisor’s assessment of what the new business will be capable of achieving. A new franchise will cost less than the purchase of an existing franchised business because the buyer will have to pay extra for whatever the existing franchisee’s business
is worth.

From the franchisor’s point of view, whether or not the buyer has its blessing will depend on the circumstances. If the selling franchisee has been running a sub-standard operation, or is failing to grow the business, or has lost interest in it, the franchisor will be keen to see that business change hands. On the other hand, there may be circumstances where the franchisor may have a conflict of interest because by sanctioning the purchase by a prospective new franchisee of an existing franchised business, the franchisor will lose a sale of a new franchise and the addition of a new outlet to the network.

Manzoor Ishani is a Senior Consultant Solicitor with Sherrards (Solicitors), a commercial practice advising franchisors and franchisees in the UK and internationally (Tel: 01727 832 830; e-mail mgi@sherrards.com; www.sherrards. com).

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