Buying a Franchise Resale

The recent survey sheds light on the diverse ways in which individuals enter the world of franchising. Notably, a substantial 36 percent of franchisees opt to purchase an existing franchise from an established franchisee. Additionally, a smaller percentage, approximately two percent, choose to convert an independent business in the same sector into a franchise.

Franchisors often grapple with estimating the startup costs when a franchisee acquires an existing unit. While average estimates for resales are typically lower than those for starting from scratch, there's a crucial factor to consider – the potentially substantial "goodwill" fee paid to the selling franchisee. Consequently, franchisees acquiring resale units commonly report higher overall initial investment amounts than their counterparts embarking on new ventures.

The variability of goodwill charges cannot be overstated. The size and prestige of the franchisor's brand often play a significant role in this equation. For instance, a business-to-business franchise with an established client base in the area can command a higher resale value compared to a similarly sized franchise relying more heavily on one-off purchases.

On average, franchisees indicate that, inclusive of working capital, savings, borrowing, and other financial sources, they invested an average of £81,900 when commencing their franchise journey. This figure is subject to annual fluctuations but generally aligns with the average of just under £70,000. What's noteworthy is that the initial fees imposed by franchisors, whether turnkey or otherwise, represent just over half of the total capital required to establish the business.

For those requiring financial assistance, the survey reveals that the average borrowed sum stands at £66,500. Notably, one in five franchisees borrows more than £100,000, with a significant presence in the hotel and catering sector.

Banks emerge as the primary source of financial support, willing to invest up to 70 percent of startup costs. They account for 81 percent of all franchisee lending, with relatives and family members making up 16 percent, marking an increase from the previous year's nine percent.

Further insights from the survey unveil that over half (54 percent) of franchisors actively aid franchisees in raising their initial investment. This assistance predominantly entails facilitating introductions to the franchise department of the franchisee's bank, a gesture extended by 86 percent of franchisors. In contrast, a smaller percentage (three percent) claim to directly provide investment, while 11 percent assert their ability to both arrange and supply financing in partnership with banks.

When deciding whether to start from scratch or purchase an existing franchise, you must take into account the total costs involved. However, consider these additional factors:

1. Availability: A startup opportunity may not be viable in your desired area, making an existing franchise more appealing.

2. Customer Base: Established businesses come with a preexisting customer base and experienced staff, offering potential advantages.

3. Cultural Shift: Changing the culture of an existing business and managing the existing staff may pose unique challenges.

4. Due Diligence: Thorough research and due diligence are imperative when acquiring an existing franchise to ensure a clear understanding of what you're inheriting.