Buying an Existing Franchise Unit

Purchasing a franchise unit can be a great way for an entrepreneur to benefit from an established business model and the guidance and brand recognition of a franchisor. However, entrepreneurs may be able to avoid the time and cost of establishing a franchise unit from the ground up by purchasing an existing franchise unit from an existing franchisee. Existing franchisees may have a variety of motivations to sell their units: to pursue other occupations, retire or perhaps because the business is distressed. In any case, you should take certain steps to protect yourself as you consider and execute the purchase of an existing unit:

Business Due Diligence: Begin by evaluating the purchase opportunity as you would any other franchise unit or business purchase. Review the franchisor’s disclosure documents, talk to existing franchisees, and consider whether the franchise represents a business that is right for you. In addition to this basic diligence, you should make efforts to learn about the health of the existing unit. Ask the seller probing questions about the nature of the business and its relationships with employees. Review the unit’s historical financial statements to determine trends in business revenues, key expenses and financial risks. Try to determine what investments may be necessary to maintain or improve operations and attempt to discover whether there may be future market trends that could impact the health of the business. Additionally, try to determine if the seller has operated the unit in accordance with the franchise model. If not, this may present an opportunity for you to improve the business quickly or it may be an indication of other problems with the business itself or the franchise as a whole.

Investigate the Franchisor’s Requirements: Often franchisors will require any purchaser of an existing unit to meet the minimum net worth and liquidity requirements applicable to typical franchisees. Franchisors may also require purchasers to engage in training and be approved by the franchisor before a purchase can occur. Additionally, the franchisor may require certain upgrades or investments at or near the time of purchase. Discuss these details with the franchisor and the seller and review the franchisor’s disclosure documents and the existing franchise agreement to plan appropriately for these issues.

Negotiate the Purchase Agreement: Most franchisors will require payment of a transfer fee to the franchisor in the event of a sale of an existing franchise unit. Be sure that you negotiate how this fee will be shared or how the purchase price will be adjusted to account for this fee. Additionally, the purchase agreement should stipulate how the franchise agreement will be transferred. Often parties will determine that the purchaser will assume the remaining term of the agreement and sign a new agreement with the franchisor at the end of the term. Be sure that your method of transfer conforms to the franchisor’s requirements as stipulated in the franchisor’s disclosure documents for transfers of franchise agreements. You should also make sure that the purchase agreement contains representations and warranties regarding the business and that the seller is held responsible for making all material disclosures about the business to you.

Use good legal counsel. Engage legal counsel that will protect your interests in negotiations with the seller and assist you in identifying issues and risks in relation to your purchase. If you are considering buying a franchise unit, feel free to contact us for assistance.