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Buying an Existing Franchise: Is their Value in the “Franchise System”?

Charles Internicola

by Charles Internicola
National Business and Franchise Lawyer

Date: 01/25/2016 | Category: Buy a Franchise | No comments

 

When  purchasing an existing business (whether a franchised or independent operation) prospective purchasers are faced with the critically important task of conducting a due diligence evaluation/investigation of the business under consideration.  While there are many steps to the due diligence process and while many of these steps are the same whether the business is a franchised operation or an independent location. One critically important distinction and factor that should not be overlooked and must be evaluated by the prospective purchaser of an existing franchise is: Whether or not there is value in the franchise system?

That is, as a purchaser, you must evaluate and determine what added value (i.e., profits and cash flow), if any, that you will be afforded by purchasing and operating a franchised business (and becoming a franchisee) as compared to a competing but non-franchised independent operation. When making this assessment you must recognize that there is tremendous variation and value between franchises – that is, some franchise systems add real value and advantages while some poorly run franchise systems simply drain the profitability of its franchisees.  When making this assessment, some of the factors that you should consider, include:

Higher Sales Do Not Necessarily Equate to Higher Profits  

As a franchisee one substantial obligation that you will be undertaking will include the payment of royalties to the franchisor.  Since royalties are typically based on a percentage of your gross sales the franchised business that you are evaluating will most likely have higher operating costs than the non-franchised business.>

Not all Franchise Systems are Equal

Some franchise systems are simply poorly run and ill conceived business operations that afford little, if any, value to its franchisees. So, don’t just assume that the franchise business that you are considering will be properly supported by the franchisor – ask questions, speak to other franchisees and evaluate the benefits of the franchise system that you are buying into.

Higher Sales Do Not Necessarily Equate to Higher Profits 

As a franchisee one substantial obligation that you will be undertaking will include the payment of royalties to the franchisor. Since royalties are typically based on a percentage of your gross sales the franchised business that you are evaluating will most likely have higher operating costs than the non-franchised business.

 

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