Whilst new franchise territories are a great fit for trailblazing entrepreneurs, a franchise resale gives established business figures something to really get their teeth into
In the early days, much of a franchisor’s time and effort goes into opening new territories. However, as a franchisor ages, reselling old territories becomes a valuable tool in its own right. Not only do resales allow franchisees to recoup on everything they have invested but they also ensure that franchisors can bring in experienced businesspeople to build the business to the next level.
But first it’s worth considering what draws people to buying a new franchise instead of a resale. One of the things that might attract someone to a new territory is that it effectively offers a blank slate and gives the franchisee the experience of building and growing their own model, albeit with the security offered by a tested model. “With a new franchise you’ve got the opportunity to start from scratch,” says Janet Walmsley, franchise recruitment manager for Oscar Pet Foods, the pet-foods franchise. “You’ve got the opportunity to build the business in the manner that suits you.”
Conversely, when a franchisee buys a resale, they’re buying an opportunity where someone has done a lot of grunt work in terms of building up assets and a customer base. “You’re purchasing an already operating business,” says Julie Taylor, managing director of Franchise Resales, the company that assists with the reselling of existing franchises. “Basically you’re buying cashflow, customers, staff, on-the-road vehicles and equipment that’s already been in play.” It also means they’re getting a business opportunity that’s already profitable and is firing on all cylinders from day one. “You’re slotting yourself into a business that’s already up to speed,” she continues.
The financials involved in a new franchise compared to a resale can also differ wildly, with a fresh unit or territory taking considerably longer to offer a return. “From day one in a cold start, you’ve got money going out and nothing coming in,” Taylor says. However, whilst a resale allows a franchisee to buy a thriving business opportunity, it’s worth bearing in mind this comes at a premium, with the incoming franchisee having to fork out both for the franchise fee and a one-time charge to buy out the previous franchisee. “That purchase fee is a sum of money you’ve got to find upfront that you wouldn’t have to with a cold start,” she adds.
Another significant difference between new franchises and franchise resales are the kinds of people that are drawn to each opportunity. New franchisees are typically attracted to starting a territory from scratch because it offers the chance to really stamp their mark on the business. From finding premises to building up an effective team, the journey offers the kind of entrepreneurial experience that buying an existing business can’t. “The newcomer is somebody who has got a bit of oomph about them,” says Barry Price, director of Swimtime, the children’s swimming-lesson franchise. “They have got a bit of that startup spirit.”
On the other hand, resales tend to need a steady hand at the tiller. “You really do have to hit the ground running,” Taylor says. “You don’t have the luxury of a slow run-in that you might have with other franchises.” Because of this, resales benefit from having a more established business figure at the helm and typically attract individuals with proven commercial credentials. “You want people that have already got proven project management, team-building and leadership skills, as opposed to somebody that will develop their skills as they go along,” she adds.
However, even an experienced hand can only do so much if the business they’re looking to buy hasn’t been properly prepared for sale. “The big challenge is when people wake up in the morning and think ‘I’ve had enough of this: I think I’ll sell my business’,” says Taylor. Even with the best will in the world, bad habits can creep in over the course of a five-year franchise term; if a franchisee has failed to keep accurate records, prepping the business for sale last minute can become a mammoth task. “All of a sudden they’ve got to clean up their act so it looks like a saleable asset,” she continues.
For this reason, it’s vital for both a franchisee and franchisor to have a clear idea of the long-term game plan for a territory. “It’s very important to talk about exit strategies: it’s not something that can be pushed under the carpet,” says Walmsley.
Having a full and frank conversation about a potential exit several years ahead of time can help to ensure the resale process is as smooth as possible and causes minimal disruption to the operation involved. “It’s important that you have a plan,” says Walmsley. “That plan can be revised but you need to have some sort of idea as to what you want long term.”
Swimming-lesson franchise Swimtime doesn’t have to worry too much about losing franchisees. Since it first began franchising in 2004, the business has grown from 40 to 200 sites across the UK, with many of its franchisees staying on for an average of six or seven years. “We’ve got some franchisees who are into their third agreement,” says Barry Price, the company’s director.
However, despite having so many longstanding franchisees, Swimtime knows first-hand the benefits that resales can bring. “At the very start of the business, we wanted to give people a really good chance of making money but we ended up creating territories that were far too big,” Price says. This left these franchisees with more business than they could handle but, fortunately, splitting and reselling parts of territories actually benefitted all involved. “The franchisees are now more concentrated and making more money than they were before, whilst we have a new franchisee that is working in that new territory,” he says.
And any subsequent resale has been viewed as a definite positive by Swimtime. “From our point of view, we’re delighted if somebody sells the franchise because it shows the credibility of our model and the business opportunity,” says Price.
A resale also offers a franchisee a great return on their investment, offering a valuable exit in recognition of all of their hard work. Price explains that from an initial investment of £7,500 ten years ago, Swimtime franchisees can now be looking at a return of £50,000 to £70,000. “The franchisee will have turned a very modest investment into a nice little earner,” he says.