If you’re exploring the possibility of purchasing an existing franchise location, you’ve probably studied the market area and considered the potential sales volume you could achieve. You’ve probably also looked at the operation itself and determined what you’d need to invest to bring it up to your standards. But before you sign a purchase agreement, you need to do some additional research. Here are some key areas to consider.
1. Determine why the owner is selling. There are many legitimate reasons for selling, such as retirement or succession planning, but sometimes there are other hidden factors. Make sure the seller doesn’t have any skeletons in the closet that could hurt your business down the road. Talk with people in the community, contact the local Better Business Bureau, and conduct Internet searches. All these resources could reveal evidence of trouble.
2. Analyze the performance of both the seller and the concept. Look at sales numbers, not just for the past few months, but over a period of years. Verify that what the seller is representing to you is accurate. You’re looking for consistent performance and no signs of downturns for both the location as well as the concept. If you see seasonal variations, perform additional research to determine whether that’s normal for this market, or if there’s an unseen cause you need to learn about.
3. Review employee relationships. Employee turnover is one of the biggest challenges facing any franchise operator. Look at the current owner’s employees to see how loyal they have been. Compare turnover rates to average data for the franchisor and the market. If turnover is significantly higher than normal, that could be a warning sign that the seller hasn’t been a good employer — a reputation that may be difficult to overcome. Higher-than-normal turnover may also be a sign of unusually low unemployment in the market, which means you’ll have to work harder and pay more to fill vacancies. Low turnover is a sign of happy employees.
4. Talk with employees. Casual conversations with employees and managers can reveal a lot about the work environment and their likelihood to stick around after a sale. You don’t need to identify yourself as a potential buyer. Instead, you can tell them that you have a nephew or know a neighbor who is looking for a job, and ask them whether they’d recommend that individual apply. Listen to their tone of voice. If you hear enthusiasm, that’s a great sign, while sarcasm and disgust are warnings of potential problems.
5. Analyze financials. Before you buy, compare the current owner’s income and sales tax returns with what has been represented to verify that the seller has been truthful. Also examine ratios, margins, and non-operating expenses. If assets are part of a potential transaction, they should be well-defined. In addition, buyers should ensure the following:
- The assets are free and clear of all liens and encumbrances
- All taxes are paid
- The seller is in compliance with all laws – federal, state and local
Acquisition funding – If you need a loan to fund an acquisition, financing is available from different sources. The obvious place to turn for a commercial loan is a bank, but the vast majority of banks don’t always understand how to value a franchise location’s true worth. Instead, consider working with specialty lenders who are accustomed to working with franchise owners. They understand how a business like yours operates, so they can approach the underwriting with realistic expectations and an appreciation for inherent risks.