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How to choose between buying a new franchise territory and an existing branch

Written by Kate Legg on Wednesday, 04 July 2018. Posted in Legal

Budding franchisees have two options when buying a franchise – getting either an established territory or launching a new one. The choice makes all the difference for what happens next

How to choose between buying a new franchise territory and an existing branch

So you’ve decided to buy a franchise and have chosen a network. Sometimes, the decisions stop there. However, in many cases, you will have the choice between either buying a virgin territory and setting up a new branch in that location or buying a resale from an existing franchisee.

This month, we look at the pros and cons of these two options.

Virgin territories

In the case of a virgin territory, you’ll be the first person to open a branch in your area. You’ll have a blank canvas and be free to select your location, recruit your own staff, launch the business and grow your reputation.

Having said this as you’ll be starting from scratch, there are no guarantees the business concept will work in your area. The franchise brand may not be well known in your territory and it may take some time before you’re able to establish the business, recover the initial investment and grow your turnover to a profitable level. You’ll be starting from zero customers and will most likely spend considerable time and money on marketing.

Similarly, although you’ll be able to recruit your own staff and choose the people you want to work for you, you’ll also have to train them. None of the staff will have any prior experience of the business and so you’ll be upskilling the staff at the same time you’re learning the ropes yourself.

Resale territories

Conversely, in a resale, the buyer takes over an already established business. This usually includes an established customer base and existing employees. In this sense, the buyer hits the ground running with a franchise that already has a turnover and hopefully, a loyal customer base. Existing staff will already be familiar with both customers and business processes and can often assist with a smooth handover to the buyer.

Further, the business will have been tried and tested in the relevant territory for some time. The buyer will be able to review historic performance figures and is more likely to be able to make a better assessment of the potential future turnover and profitability.
The risk with a resale is that if the business has a poor reputation or troublesome employees, the buyer inherits those problems. All employees will have a right to transfer with the business, regardless of whether the resale is an asset sale or share sale. As a result, any employment issues will also transfer. This could include, for example, a course of disciplinary action or grievances raised by staff or even simply a group of employees who’ve become set in their ways and are resistant to changes that a buyer may want to introduce.
Similarly, if the business has a poor reputation in the area, the buyer will need to overcome the negative perception and invest heavily in new marketing initiatives to try and regain customer trust.

Cost

From a financial perspective, it’s often difficult to make a straight comparison between a virgin territory and a resale. With a virgin territory, the cost of buying the franchise rights themselves may be cheaper, but the buyer may also need to invest in new premises, buy initial stock and equipment and the costs of recruiting and training new employees.

In the case of a resale, there will be the purchase price, plus the legal and professional costs associated with the acquisition. These are likely to include advice from a solicitor and accountant and the buyer may also be required to contribute to the franchisor’s legal costs. However, usually, there wont be further costs to fit out premises, buy equipment or recruit and train staff.

Legal processes

The legal process is usually quicker and cheaper to acquire a virgin territory. Typically, the only legal document will be the franchise agreement. All buyers should have the agreement properly reviewed by an experienced solicitor to ensure they fully appreciate the extent of obligations they are taking on. A review of a franchise agreement can usually be completed fairly quickly and is relatively inexpensive.
If the buyer is taking on premises, then legal advice may also be required in connection with the grant of the lease. Locating and securing suitable premises may take some time. If the premises are leasehold, timescales will be governed in part by the speed of the landlord’s solicitor.

In the case of a resale, the main documents will include the sale agreement and franchise agreement. Depending on how the sale is structured, there will also be a variety of ancillary documents. The legal process for buying a resale typically takes a couple of months, although if there are delays with landlords and/or funding requirements, the process could take much longer.

Overall, there are pros and cons to both alternatives. Which option is best depends on the specific circumstances of each deal. Furthermore, in some networks, there may be no choice – a young network may have only virgin territories for sale whilst a more mature network may only be able to offer resales.

In either case, the key is to thoroughly research the business opportunity you’re considering. Detailed business plans should be prepared, ideally including “best” and “worst” case scenarios. Only after thorough research is it possible to evaluate and compare the different opportunities that may be available.

About the Author

Kate Legg

Kate Legg

After more than a decade advising other business owners, Legg has recently fulfilled a long held ambition and become one herself. Now the founder, director and CEO of Komerse, a legal practice specialising in commercial law and franchising, Legg is clearly practising what she preaches.

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