So, you've decided to buy an existing franchise as opposed to starting one from the ground up? Buying an existing franchise, as opposed to starting one, can make sense for many different reasons. Often, there are already staff and customers in place, cash flow, and brand recognition. Within the franchise industry, this is known as a “franchise resale.”
A franchise resale is a coordinated effort involving multiple parties. The parties involved can include the buyer, the seller, the franchisor, and frequently, the landlord. Each party has a distinct, but connected, role in the transaction.
The buyer, through due diligence, should address several areas of potential concern; the end goal being assurance the initial valuation is realistic. A buyer will want to identify potential risks (is there pending litigation, existing liens?) and uncover information useful to the negotiation process. It is important during this “due diligence” period to assess the strength of franchise intellectual property, assess the strength of franchise (and related) agreements, ensure compliance with franchise sales laws/practices, assess financial strengths and weaknesses of the franchise, measure growth potential, and understand the purchasing/supply chain.
The franchisor in the transaction may have a “first right of refusal.” This means that when a seller wishes to convey any interest in the franchise, the franchisor has first right of refusal to purchase that interest. The exact details regarding a first right of refusal will be specified in the existing franchise agreement. Additionally, the franchisor may require a transfer fee be paid. The franchisor must approve the sale and the potential buyer, so this fee covers the franchisor's administrative costs. The good news is this fee is negotiable as part of the transaction and can be paid by either the buyer or the seller. So a buyer will want to ensure that this fee will be included in the purchase price and that no further fees will be requested.
In instances where a landlord is involved in the transaction, the landlord is a critical component. The buyer will likely wish to continue operating in the same retail space. If so, it will likely be advantageous to the buyer to assume the existing lease. By assuming the existing lease, the buyer will retain the seller's lease terms, and therefore will not experience an increase in rate. The landlord may first want to familiarize itself with the potential buyer/lessor's financials, business plan, and reputation, among other pertinent details.
Purchasing an existing franchise presents its own set of unique challenges. Yet there are advantages to buying a business with existing brand recognition, existing customers, clients, and cash flow. An experienced franchise attorney can help the buyer fully understanding the complexities of the transaction and all the parties to the transaction and their respective interests.
Contact Providence Law for more information.
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