Do your Homework Before Buying a Franchise

Franchised businesses have a higher success rate, however more homework is necessary to ensure that the business being bought is a profitable, going concern with a great future.


Do your Homework Before Buying a Franchise

Taking over an existing franchised business as a going concern requires research, homework and decisions based on sound advice. Many people entering franchised businesses are doing so for the first time, and are often using hard-won savings or accrued pension funds to realise their dreams of independence.

Getting the Right Advice and Support

Banks are well placed to offer advice on finance and also offer potential purchasers peace of mind by having extensive knowledge of which franchisors give franchisees the highest levels of support.

The extensive knowledge of franchising is backed by the ability to help a prospective business purchaser take a 360-degree view of their financial status and offer them specialist support from other financial areas. This gives clients the advantages of a streamlined, integrated financial base and easy control over all their needs.

What is not generally known is that many franchisors require operators to refurbish their outlets every five years. When making an offer on a business, it is vitally important to ascertain when a revamp is next due. Failure to do so could find you paying for a business without knowing that major costs are waiting around the corner.

Things to Consider When Buying

When researching a franchise you should know that purchase and sale agreements are vital. They must comply with specific legislative criteria such as the Insolvency Act. It is also required, for instance, that advertisements are carried in newspapers of all languages for 30 days prior to a sale to ensure that creditors who may have done work for the original owner do not end up knocking on your door later to demand payment.

The major research begins with the banking aspects and the actual value of the business assets. A business may have many fittings such as shelves, freezers and catering equipment. The stated value may be several million rand. What may not be realised by the purchaser, however, is the fact that over time these assets depreciate.

Their value drops and, because of wear and tear, and if the purchase of the business is made late in the lifecycle of the assets, they may be worth very little.

Getting an approved valuation from an expert should therefore be the very first step in the purchase process. It is essential that a valuation is made on site. Desktop valuations where only information on hand is used without leaving the office should be avoided. Attention should be paid to all equipment ensuring that it is all in good working order and there are no faults that could be expensive to rectify later.

Ownership of assets should also be clearly ascertained. In some cases specific equipment may be owned by the franchisor, rather than the franchisee. They should not therefore be included in the overall value of the business. It should always be borne in mind that a correct list of assets is invaluable when applying for bank finance, as it provides the bank with security against a loan.

A goodwill payment should also not be included as a business asset. A medium-term loan or a business-term loan should rather be considered.

Stock in hand is also not considered as an asset. This is because some franchisors hold non-negotiable general bonds over the stock. The stock is owned by the franchisor until payment has been made by the franchisee.

A Great Future

Buying a going concern is also not simply a case of signing an instalment agreement sale.

Essentially, when financing an existing going concern, Standard Bank uses a ‘sale and lease-back’ mechanism to complete the transaction. The timing of this transaction has got to be just right as ownership has to pass from the old franchisee to the new franchisee and documentation must be signed as ownership passes across.

When making a move into a franchised business the question of buying a new or existing outlet is obviously top-of-mind. Buying an established business that has a solid customer base and a financial history may be regarded as first prize. It is more likely to be so if the deal is approached with caution.

Franchise Zone
About the Author
Franchise Zone is published by Entrepreneur Media SA. It offers advice and franchising opportunities in South Africa.

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