Buying an existing franchise at resale is very different from buying a franchise for a new location in a new territory. While some of the key steps and considerations are similar, there are additional key steps and considerations as well. In this article, franchisee lawyer Jeffrey M. Goldstein discusses what is involved in buying a franchise that is already up and running.
The Franchisor Must Approve the Resale or “Transfer”
Franchisors like control. They like to control all aspects of their franchise systems, and this includes controlling who is entitled to operate under their brands.
As a result, franchisors almost universally reserve the right to approve resales (or “transfers”). So, before you commit to anything with the seller, you must first make sure that the franchisor will approve you to take over the seller’s business. Most franchisors have an application process, and you will need to go through this process before forging ahead with your purchase.
You Must Review More than the Franchise Disclosure Document (“FDD”) and Franchise Agreement
Just because the current franchise owner has been successful does not necessarily mean that you will find success as a franchisee. You will need to carefully review the franchisor’s Franchise Disclosure Document (“FDD”) and franchise agreement to make sure you are confident that you will be able to succeed under the terms that govern.
But, when buying a franchise at resale, these are not the only documents you need to review. You must review the seller’s business and financial records as well. Is everything accurate and up-to-date? Is there anything that gives you pause? Do you anticipate more (or less) costs once you take over as the operator? These are all critical questions you need to answer.
You Must Determine an Appropriate Value for the Franchised Business
Once you receive the franchisor’s approval and decide to move forward, the next major step is to determine an appropriate value for the franchised business. The valuation of franchised outlets is unique from the valuation of independent businesses. For example, unlike independent business owners, franchise owners typically do not have proprietary rights in their customer lists. These lists usually belong to the franchisor—along with the brand(s), system operating standards and other intellectual property.
You Must Sign the Franchisor’s “Then-Current” Franchise Agreement
Finally, in addition to signing an agreement with the seller, you will most likely also need to sign the franchisor’s “then-current” franchise agreement. This won’t necessarily be the same franchise agreement signed by the seller. It will be important for you to identify any significant differences between the seller’s contract and your contract, and you will want to work with a franchisee lawyer to make sure you are protecting yourself to the fullest extent possible.
Schedule a Confidential Consultation with Franchisee Lawyer Jeffrey M. Goldstein
Are you thinking about buying an existing franchised outlet? If so, we encourage you to contact us for more information. To schedule a confidential consultation with franchisee lawyer Jeffrey M. Goldstein, call 202-293-3947 or send us your contact information online today.