Pros and cons of investing in a resale

A third of franchisees are now running an existing franchised business. Graeme Jones explores the latest findings from the NatWest/bfa Franchise Survey and discusses the pros and cons of investing in a resale 

The 2011 NatWest/bfa survey reveals that a significant proportion of franchisees - 36 per cent - purchase their franchise as a resale from an existing franchisee, and small proportions (two per cent) simply convert an existing independent business of the same sector.

Franchisors find it difficult to estimate start-up costs for an incoming franchisee in the event of a resale. When provided, average estimates tend to be lower than for starting from scratch, but this should be balanced against what might be a substantial ‘goodwill' fee (paid to the franchisee). Indeed, franchisees purchasing resale units report higher overall initial investment sums than those starting from scratch.

Goodwill charges are highly variable. The size of the system appears to be at least part of the equation, with the bigger brands tending to command higher resale values. For example, a business-to-business franchise with a list of established clients in the area is able to command more than a similar-sized franchised business that relies more heavily upon one-off purchases.

On average, franchisees indicate that, including working capital, savings, borrowing and other sources of finance, they invested a total of £81,900 when they started up their franchise. This figure is subject to annual variation, but is broadly consistent with the average of just under £70,000 for 2008. What it does indicate is that the initial fees levied by the franchisor (turnkey or otherwise) represent only just over half of the total sum required to set up in business.

For people that need to borrow money the survey shows that the average sum borrowed was £66,500, with one in five borrowing in excess of £100,000 (with such investors considerably over represented in the hotel and catering sector).

Banks will invest up to 70 per cent of the start-up costs to a prospective franchisee and are the most common source of lending (81 per cent), with relatives/family (16 per cent) the other significant lenders (increased from last year - nine per cent).
More than half (54 per cent) of franchisors assist franchisees in raising their initial investment. In most cases (86 per cent), this assistance is in the form of arranging an introduction to the franchise section of their bank.

However, three per cent claim to supply investment and 11 per cent say they can both arrange and supply in conjunction with their banks.

So your decision on whether to start from scratch or buy an existing franchise may be influenced by the total costs involved, however also consider the following:

• There may not be an opportunity to start up one from scratch in the area that you want.
• An established business will already have customers and experienced staff
• Changing the culture of an existing business and staff may be challenging
• You need to undertake a good level of due diligence to ensure you know what you are getting.

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