A Corporate Franchise is Up for Sale – Do You Buy?

Consider these factors before buying a company-owned franchise unit.


A Corporate Franchise is Up for Sale – Do You Buy?

There are three ways you could become franchisee: Buy a new unit, invest in an existing franchisee-owned store, or purchase a company-owned store that’s being re-franchised.

Re-franchising can be driven by any number of motivations, and it may represent a wonderful opportunity for a careful buyer in the right circumstances.

To understand whether or not purchasing a company-owned unit would be a good opportunity for you, establish why the company acquired the unit and what has changed. These factors might involve:

Earnings:

Franchise companies often begin acquiring units in their system (either by opening new ones or by buying out existing franchisees) to increase company earnings. They have excess capital and decide to invest it in this manner. This is the most common motivation for investing in company-owned stores, especially in large franchise systems.

Operational experience:

Many franchise companies purchase and operate units in their systems in order to stay closer to the point-of-sale experiences that their franchisees face every day.

It also allows them to develop operational support staff that have the real-world experience needed to give them credibility with the franchisees.

Training facilities:

Franchisors sometimes acquire company-owned units to use as live training facilities for new franchisees or staff.

First right of refusal purchases:

Many franchisors acquire units to facilitate or control the exit of a franchisee. Such purchases might be based on negotiation with an exiting franchisee or on the company exercising a first right of refusal on a proposed sale. In either case, the franchise company typically isn’t buying the units to hold onto but rather re-sell to another franchisee.

Just as there are a number of reasons why a company might decide to acquire units in their system, there are also a few different reasons they might decide to sell them. It’s important to understand their reasoning if you’re contemplating purchasing a company-owned unit. The most common reasons are:

1. Financial management:

Many of the franchises with lots of company-owned units are large publicly traded companies. They typically purchase units as investments and use this ownership position to control fluctuations in their cash or earnings position.

These decisions are usually driven by financial rather than operational executives. If this is what drives a decision to sell, it can be a great opportunity for the buyer as there isn’t necessarily a negative stigma.

2. Overall strategic decision:

Sometimes a company will decide, for strategic reasons, to sell a significant percentage or even all of their company-owned units and deploy their investment cash in a different manner. These situations can be great opportunities because, again, the decision to sell was not necessarily driven by poor performance at the unit level.

3. Poor operating results:

Sometimes a company will sell units because their performance is bad and the company doesn’t want to keep losing money operating them. Though this can represent an opportunity to get a good deal, be careful about purchasing someone else’s problems.

Franchisee-owned units tend to perform better than company-owned units, but if the problem with the poorly performing unit is related to something like real estate, a good operator may still end up losing money. Evaluate a potential purchase carefully if the seller is motivated by a desire to eliminate losses.

The overall advantage a buyer has when purchasing a company-owned unit is that there is an operating history that they can review.

It’s often possible to gain an immediate, profitable customer base and have positive cash flow from the first day of ownership. You are certainly going to have to pay more for such immediate success, but for many this type of purchase represents a safer option than starting a new franchise from scratch.

As with any franchise acquisition, the key to success in buying a company-owned unit is to make sure you’ve done thorough research. Also, involve experienced advisors such as an attorney and accountant. Know the motivation of the seller, follow this advice and you’re well on your way to a good result.

Jeff Elgin
About the Author
Jeff Elgin has developed a consulting system that matches pre-screened, high-quality prospective franchisees with the franchise opportunities that best fit their personal profile.

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