A breakdown of what you need to be aware of when considering whether to go new or previously owned with a franchise location
Many prospective franchisees assume that the only option available to them is to start from scratch with a new location. And while this may be attractive to an ambitious go-getter looking to launch their own bespoke business, there are also many benefits to purchasing a resale location, either from the franchisor itself or from a franchisee of the system.
Understanding the pros and cons of each approach can help you determine the option that’s right for you. Of course, in the end, the franchise system you’re eyeing may only have one option available, and you won’t have a choice in the matter. But arming yourself with the facts before you reach out to the franchisor you’re considering can go a long way in setting you up for success.
The following tips were taken from the FranTalks webinar “Franchise Grants: New vs. Resales,” presented by Joseph Adler of Hoffer Adler LLP.
When should you consider purchasing a new location?
When looking to purchase a new franchise location, it can seem like the world is your oyster. However, there are still two sides to every coin. Let’s look into some of the reasons why establishing a new location might be the best way to start your franchise.
If the system has specific needs or wants that haven’t been met in its current areas.
When purchasing a new franchise, you can work with the franchisor to determine what location makes the most sense, both for the system at large and for your needs as the owner. But just because you want to open your business in a specific city, region, or neighbourhood, it doesn’t mean that the franchisor will agree to it. If a franchisor wants to open specific types of locations (like inside a mall rather than a standalone unit) you may not get the exact location type you hoped for. Be prepared to consider alternatives if your first choice isn’t greenlit.
If you’re looking to slash certain fees.
New location purchases are generally more straight-forward. The agreements are usually generic and boilerplate, and some aspects of the sale, such as a transfer fee, don’t apply. This can speed up the process and reduce your upfront costs.
If you—and the franchisor—are open to fresh ideas.
As you won’t be privy to the historical data of the location—simply because it doesn’t yet exist—you won’t have to review as much information leading up to signing the franchise agreement. On the flip side, this can also be seen as a con: you won’t have access to historical data, again because you’re starting from scratch, so the potential of the location is unknown. Still, looking to the results of the franchise’s other locations and the market research can help you gain a better understanding of where franchisees find the most success.
If you want to build your staff from the ground up.
With a new location, you’ll have the opportunity to handpick the people who you feel will fit best in the system, and those who you feel will work best with you. On the other hand, filling your staffing needs takes a lot of effort, and for a business model in which you aren’t an owner-operator, this can certainly extend the length of time until launch. Of course, the franchisor is available to support you throughout this phase, though in the end it’s up to you as the franchisee to build and lead your ideal team.
When should you consider purchasing a resale location?
A resale unit becomes available when either the franchisor or the franchisee, with the franchisor’s approval, puts it up for sale. In the franchisor scenario, the unit is purchased back from a franchisee because they defaulted on their agreement, the franchisor has terminated the agreement, or the franchisor is interested in acquiring it for other reasons. Franchisees can also sell a location they own—again, with the franchisor’s approval—if they wish to offload one of multiple units, plan to leave the system, have struggled with sales and want to end the franchisor-franchisee relationship, or are going to retire.
There are a lot of benefits to purchasing a resale franchise location. But, as with any contractual agreement, there are several important elements that you should consider.
If you’re looking for a ready-made, prebuilt solution.
Working with a franchisor to investigate markets where the brand’s target demographics reside and where there’s a hunger for its products or services can also take time. With a resale location, this work has already been completed by the franchisor and/or former franchisee as they conducted research to determine the best spot for this specific storefront or office. You can also save time because you don’t have to deal with contractors throughout the construction of a new unit.
That’s the beauty in a resale: it’s already there, ready to go, and all you have to do is step in. Keep in mind that this means you’re absorbing any issues that come with the building or retail space, though the seller, whether a franchisor or franchisee, needs to outline these in the disclosure document, which includes all pertinent information that you as the buyer will need to make an informed decision.
If you’re keen to negotiate.
Unlike a new location purchase, which is often fairly rigid in its terms, a resale has room for negotiation. Tap legal and financial professionals to review the disclosure documents and the franchise agreement to determine if there are areas where you can push back, based on previous performance or any issues with the physical location itself. (For example, if repairs to the building are needed.)
If the thought of building your own staff isn’t appealing.
Resale locations often come with full or partial staff that are holdovers from the previous owners. This can be a benefit since, as previously mentioned, hiring and training staff can be onerous. Then again, other situations can emerge. If, for example, staff had an affinity with the previous owners, you may see yourself dealing with sore feelings as you begin to lead the crew. On the other hand, depending on the management style of the former franchisees, you may have to work even harder to get the location into shipshape, if the employees were part of the reason why the location didn’t initially succeed under previous ownership. Addressing any staffing issues with the outgoing franchisee will be instrumental to early success with your new team.
If you want to hit the ground running.
As the brand already has a presence in the area, the resale location will therefore likely come with a customer base. This could mean that you have customers lining up around the corner for their morning coffee, or whatever your business offers as its product or service. But it could also mean that if the location was mismanaged, you may struggle to attract customers. However, if you do your research, and the documents you’re provided by the franchisor or the former franchisee are thorough and trustworthy, you’ll be well prepared for whatever the local population throws at you.
These are just some of the factors that you need to take into consideration as you examine your franchise purchase options. Above all, be sure to speak to your trusted franchise business and financial advisors before making a decision. And don’t be afraid to ask questions of the franchisor—this is your investment, after all.