Entrepreneur's Journal: Jumpstarting things by purchasing an existing franchise

Posted Aug 24th 2008 3:40PM by Tom Taulli
Filed under: Small Business

A franchise can be a great way to start your entry into self-employment -- and strong income. Yet, there are still risks -- such as with site locations and hiring employees -- and lots of upfront costs.

But there is another approach; that is, purchasing an existing franchise (which is known as a "resale"). What are some things to consider? Well, let's take a look:

Track Record: With some due diligence, you can determine whether a franchise is successful or not. Besides getting the financials, you can talk to customers as well as vendors.

Turnaround: What if the franchise is failing? Yes, this can be an opportunity to get a business on the cheap. But, of course, this can be risky. Do you have the expertise to make the changes to get the business on track?

Keep in mind that turnarounds are often much tougher than you might expect.

Valuation: It's likely that the franchise owner will be running various personal expenses through the operation. Thus, as much as possible, try to exclude these items. The goal is to come up with the real profitability of the company.

Next, you need a way to value these earnings (assuming you think they can continue). This is usually done by applying a multiple. For example, a Subway may fetch 4 times cash flows.

Where do you get these multiples? Well, there are some books on the topic, such as The Business Valuation Book (with CD-ROM). You can also get the help from a business broker (the largest operator is VR Business Brokers).

Finding Franchises: There are several websites where you can find franchises for sale. One good resource is BizBuySell, which has an extensive directory.

Fees: There may be a transfer fee (which could be hefty). So, early in the process, get the franchise agreement. And, of course, it's a good idea to have an attorney help out with things.

Tom Taulli is the author of various books, including The Complete M&A Handbook and The Edgar Online Guide to Decoding Financial Statements. He is also the founder of BizEquity.com., a valuation website.

Tags: bizbuysell, business valuation, Franchises, subway, VR Business Brokers

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Reader Comments (Page 2 of 2)

9-13-2008 @ 1:46PM

Ed B. said...

To Mike Shaw (who is considering a Dunkin Donuts franchise) -- I say "don't go there." I've had countless problems with that company (corporate-wise) and no one will step up to the plate. If Dunkin's corporate office won't return my phone calls or answer my e-mails, that tells me: "You bought it...you're stuck with it...so deal with it and don't bother us!"

9-13-2008 @ 1:22PM

patrick said...

if you are going to open a buisness just figure out what your operating cost are going to be then add your labor . divided by your product cost.thats how many customers you need a day to make 35%profit.

9-13-2008 @ 1:20PM

Patrick said...

If you are going to open a business just find out what your operating cost is daily then add your labor then divide by your product cost. That will tell you how many customers you need a day to make your 35% profit.

9-13-2008 @ 3:39PM

Don said...

Wah! Wah! Wah! Sounds like our friend Hank has the Chicken Little syndrome (The sky is falling! The sky is falling!). All is not lost. Actually, this is a great time to go into business. Do your homework. Do your research. Prepare. Make the decision and......GO FOR IT! Remember...The best time to plant a tree was 20 years ago. The 2nd best time to plant a tree is NOW! Go ahead Hank, take the plunge. if you wait around till everything is perfect, it'll be time to retire! You're only young once!

9-13-2008 @ 4:54PM

Corey said...

If you are considering buying a franchise, talk to me first. I found something that beats owning a franchise and costs very little to get in on. If you want to know how to make a six figure income in your own business, reply for details.

9-16-2008 @ 5:52PM

tired said...

Really tired/bored of the same old comments on this subject.
Seems like it has been blogged for the last 2-3 months.

9-24-2008 @ 7:13PM

corey said...

If you are thinking about buying a franchise, talk to me first. I can get you into an amazing business that can generate over $100K in the first year. The startup cost is under $2K.... how does that compare with Subway...or ANY franchise?

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