What to Consider When You're Looking at an Existing Franchise for Sale
In franchise terminology, an existing franchise for sale is called a "resale." Buying an established franchise can have some advantages over starting a new franchise from scratch, but it's essential that you consider a range of factors before taking the plunge. The potential benefits of buying an existing business could mean immediate cash flow, trained employees, a ready market, reduced startup time and an easier time getting financing. Franchise resales range from struggling to highly successful, and no matter where the franchise you're considering falls in this range, you will have an opportunity to capitalize if you know what to expect with each.
The first thing to consider when buying an established franchise is why the business is up for sale. Is the owner retiring, looking for a change or trying to get out from under debt? When you find out why an owner is selling, you'll find out some critical information about the franchise itself. You may find out the franchise owner just isn't cut out for the job and the business is struggling to get off the ground or you may find the franchise is doing quite well. Again, there is opportunity no matter how well, or poorly, a franchise is performing.
The owner of any franchise resale will put the most favorable spin on any information they provide, so it's also important to look to other sources such as franchisors, competitors, industry resources and, if possible, previous and current customers and employees. Most of the information about an existing franchise for sale will come from the owner and the more questions you ask, the more information you'll potentially receive. Here are some fundamental questions to get you started:
- What is the motivation for selling?
- What financial performance has the franchise had over the last few years?
- What trends has the owner identified?
- What is the status of the employees?
- If the franchise includes a physical location, what is the status of the real estate?
- What is the brand presence in the service area?
The answers to these and other questions should give you a big-picture view of the franchise, but every answer should eventually be validated with documentation and other resources. A franchise owner may be unable or unwilling to provide certain answers, but the franchisor may be able to help you fill in the gaps. You can find out more about cleaning franchises for sale and new franchises on our franchise page.
Determining the Value of a Cleaning Franchise for Sale
It's important to first understand that business valuation is not an exact science. If the existing franchise for sale is performing well, valuing the business can be fairly easy. By reviewing financial statements, you'll have information about net cash flow, which will include revenue, expenses and other relevant figures. The best valuation method is to use a multiple of the net cash flow to determine what kind of income you can expect.
Keep in mind that many business owners run expenses through their business that may not be directly related to operating costs. Company cars, basketball seasonal tickets, entertainment and meals, unusually high owner salaries and a range of other expenses are not uncommon, but they are often not necessities either. By adding back any unnecessary expenses you will have a more accurate picture of the true net cash flow.
If the cleaning franchise for sale is not performing well, an accurate valuation will be harder to determine. The existing owner may have many good arguments about why the business isn't performing, but ultimately it comes down to whether you think a change in ownership will improve the performance. If you've consulted with the franchisor, you may find that the owner hasn't been running their business according to the franchise system. This deviation from a proven system may be the primary reason for poor performance. Comparing the franchise in question to other franchises in similar locations and finding that they are experiencing success should give you the confidence to continue your valuation.
You can expect to pay a premium for an existing cleaning franchise for sale, sometimes up to 30% more than investing in a new franchise. If that "premium" is warranted with financial data, then it may well be worth it to invest in an established business. Otherwise, you may want to consider opening a new cleaning franchise with the franchisor instead of the resale. Regardless of a franchises current performance, taking the time to cover all your bases and arriving at a fair valuation will minimize your risk.
Even with due diligence, you will need an attorney experienced in business purchase agreements to guide you if you're buying into an existing franchise. Buying an established franchise isn't overly complicated, but a good attorney will identify a range of protections you may not know about and help you decipher some of the financials.
Finding an existing franchise for sale can be a great way to jump right into the franchise industry. You could find a cleaning franchise for sale that has a solid customer base, a great reputation and a promising future, or you could potentially turn around an underperforming franchise. To find out more about existing and new cleaning franchises with an established franchisor, request franchising information from The Maids and find the opportunity you've been looking for.