In franchising you will find a small sub-sector, known as Franchise Resales, where existing franchises are being sold. Franchise Resales are established franchises that are being sold by existing franchisees who are looking to exit their business.
On the surface, acquiring an existing business can seem a logical way to go. After all, the business will be generating positive cash flow (in theory) and will have gone through the initial setup period to the point where it’s more stable.
However, purchasing a resale is not something that we recommend, particularly if you have spent your entire career working in a corporate environment.
The Realities Of Small Business Ownership
There is a significant difference between managing a business with P&L and staff management responsibilities, and running a small business. In a small business setting you simply don’t have the support staff that you’re used to taking care of the smaller functional roles, such as accounting, legal, employment issues and vendor account management. When you’re running a small business you’re usually all hands-on deck and even if you have staff to cover some of these functionalities, there will be times when you’re required to pitch in.
Very Rarely The Numbers Make Sense
Very often the numbers in a franchise resale don’t make sense. We’re referring to this in two ways and both are extremely important. When coming from a corporate background, particularly a senior corporate background where you were on a six figure salary, rarely does it make commercial sense to invest six figure sums into buying an established business, that in most cases will be generating a five-figure cash output, at best. Not when you could just walk into another five or six-figure job and save yourself the financial outlay.
Additionally, even though you may have been managing corporate finances that run into the millions, it’s quite unlikely that you have strong skills in general management accounting principles and are able to accurately assess and value the worth of a business.
You should remember that buying a business is very similar to buying a house in terms of the amount you will pay. The only difference is that with a house you tend to have bricks and mortar, while with a business you tend to have contracts and ‘goodwill’.
If you are naturally risk averse, as are many of the corporate professionals that we’ve worked with, then you will not be willing to risk everything you’ve built up over the course of your career by taking a gamble on one business, no matter how much preparation and expertise you bring in.
Accessing The Right Resales Opportunities Can Be Challenging
You may or may not be surprised to learn that many of the businesses for sale on websites and by business brokers have inherent flaws associated with them, which is normally partly why the owner is selling in the first place.
These businesses tend to come with bloated prices, largely from poor business valuations and the need to cover the broker’s inflated fees. They have chronic issues that can be costly to fix, such as requiring a complete rebranding due to poor reputation, or lack of available talent to grow the business further.
The truth is that most good businesses are sold before they even reach the open market and are never listed with a broker in the first place. Good businesses are typically sold to family members, employees, competitors, suppliers, or in the case of franchising, to neighbouring franchisees. They already have people waiting to purchase the business before it’s even up for sale.
When the owner is ready, they usually approach the people they know, work through negotiations and agree a sale, have an attorney draw up contracts and transfer the business before anyone is aware of it. The negotiations tend to be quicker because both parties know the inherent value of the business and the buyers are prepared to pay a fair price, rather than engage in pointless, drawn-out emotional negotiations.
With an established business you can never be entirely sure what you are buying. Even the best run businesses have skeletons in their closets that can come back to bite. With a new franchised business, you will be starting with clean books and will have the franchisors staff on hand to teach you how to run the model in the way it was designed to work.
Having The Experience To Run An Established Small Business
There are other reasons that enforce why you shouldn’t go down the path of purchasing an established business. One is down to experience. We’ve covered this before, but business ownership is a completely different beast to corporate life.
If this will be your first business, then you will have to factor the lack of business ownership experience into your plans. Right now, you don’t know what you don’t know. Fortunately, with a franchised business you have the help and guidance of the franchisor to help get you up to speed, but with an established business any dropped balls can prove to be costly mistakes.
If you still wish to explore acquiring a resale then the best way to go about it is some good old-fashioned networking. Speak to people you know, attend local chambers of commerce meetings and talk to as many local business owners as possible. Ask who they might know who is ready to sell and keep an open mind – you never know what opportunity might present itself.