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How to reduce the risks involved in resales

Written by Nigel Toplis on Friday, 18 November 2016. Posted in Insight

Resales bring myriad benefits for franchisors, existing and fresh franchisees alike. But there are still certain pitfalls every party should avoid

How to reduce the risks involved in resales

Resales are an integral part of franchising and are of equal benefit to all parties – whether that’s the existing franchisee, the new franchisee or the franchisor. The existing franchisee gets a reward for building a capital asset. Meanwhile, the incoming franchisee gets a ready-made business with staff, customers and income from day one. Finally, the franchisor benefits by – hopefully – getting a younger, fresher franchisee with the drive, enthusiasm and ambition of the original franchisee when they started. It’s a win-win-win.

However, no matter how beneficial it may prove, there are still some key factors to consider as a part of the resales process. Firstly and most importantly, the franchisee doing the selling has to be realistic in valuing the business. I’ve been involved in more than 100 resales and in virtually every case the franchisee has overvalued the business.

Part of the reason for this is that the business is very personal to the franchisee. They have invested their heart and soul into developing it and stamped their personality on it. Additionally, they know the potential of the business and that it hasn’t yet been maximised. Surely there is some value in that? Ultimately, the answer is no. For the buyer, it’s not that personal. They make decisions with their heads, not their hearts: it’s about analysis, logic, objectivity and a multiple of profit.

For new franchisees, when they buy an existing business they get all the advantages of a business in operation but there are also some downsides. Sometimes is doesn’t quite have the staff you want. It might have processes that were developed over time but have deviated from the franchise specification. Its customers may leave simply because another brand is more convenient or you may have to let some clients go as you can’t afford to maintain their special pricing arrangements.

As a franchisor, new blood should be good news – after all, it brings increased drive, fresh energy and renewed ambition. But even for a franchisor a resale can prove to be a headache. Part of the reason for this is that any problems for the new franchisee become problems for the franchisor. Generally, the buyer will have higher bank borrowings than their predecessor and will need to make a more significant personal investment. This often means the hand-holding period for the franchisor will potentially go on for longer the second time around.

Despite these potential issues, resales play an indispensable role in creating an energetic, progressive and dynamic franchise system. The benefits of increasing capital assets, building new client relationships and revitalising the franchise far outweigh any downsides. However, it’s important to remember that each party – whether they’re an existing franchisee, new franchisee or franchisor – have responsibilities they need to fulfil seriously with both transparency and honesty.

About the Author

Nigel Toplis

Nigel Toplis

It’s safe to say Toplis has form when it comes to franchising. As managing director of The Bardon Group, he has led the growth of some of the UK’s best-known franchises, including The Zip Yard and Kall Kwik. Toplis lists work as one of his hobbies but he also enjoys his fair share of travel, horse racing and red wine.

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