Resale away

After 35 years in the print industry, Graham Mitchell wanted to buy a franchise but was reluctant to start from scratch. Instead if launching a completely new business, he instead chose to acquire Recognition Express's South East Scotland franchise from its previous owner. "It was an established operation with a customer base of 300-400 customers, including some blue chip," he says. "And I saw it as an extension of my career.  All I had to do was take over the sales side of things. In my view, purchasing a resale is much safer than buying a new territory."

He is not the only one to come to this conclusion. It is commonplace for people to buy a resale unit, rather than a 'virgin' territory.  Around two in five franchisees interviewed for the bfa/NatWest Franchise Survey 2008 had bought a resale unit, rising to three in five who started over the last two years.

The risks of taking over an established business are considerably lower. "Choosing an existing business provides a stronger starting base for new franchisees, and that's a fact," says Derrick Simpson, managing partner of Franchise Resales. 

Resales have a cashflow from day one, he points out - a huge advantage when poor cashflow is a prime cause of business failure.  They also have a brand presence in the marketplace - and because they are already trading, the customers, staff and often premises are already in place.

So it's little wonder that resales often command higher sums, of over £1 million in some cases.  Yet in other cases, established businesses especially of the man-and-van type and without premises can be bought for much smaller sums, making them an attractive proposition from the start.

"An established business will always be worth more than a greenfield site," says Dan Archer, franchise development director at X-Press Legal. And many new franchisees can benefit from that: "An established business has cashflow and profitability from day one, as well as premises and staff, which means there is a shorter timescale which can be very beneficial."

Raising the capital for a resale is usually more straightforward. Banks are particularly amenable to loans for a resale, Mr Simpson points out, since the track record is already established and cashflow is there from the start. Other options include phased payments to cover higher costs.

A successful franchisee can start planning their exit strategy from day one, with a view to the selling the business for a healthy profit five or 10 years down the line. A good franchisor will help from the start, says Mr Simpson: "Forward thinking franchisors will assist their franchisees to write a Prospectus of Sale, or introduce them to specialist third party advisors such as Franchise Resales Ltd."

Yet prospective franchisees still need to do their due diligence, and negotiate for an accurate valuation based on the levels of pre-tax profit the business generates. "You should be able to receive more comfort about a franchise resale than an independent business transfer or sale because with a franchise resale you have the franchisor to corroborate the information about the business involved," says Mr Simpson. "They will certainly have a view on its performance and potential."

There are two types of resale - premium and distress, says Robin Page, Cash Generator's franchise director. "A premium resale is an existing franchisee deciding to retire and looking to sell his successful business for a premium rate, incorporating client base, stock and the team, whereas a distress resale may be due to ill health, or the industry not suiting the franchisee, and these tend to be speedier sales at reduced rates."

A distressed sale brings its own issues. In isolated cases, where the outgoing franchisee has had difficulties with customers, a new franchisee needs to put extra effort in to build the business to its full potential.

"When a franchisee takes on a virgin territory, we can offer them a system which is absolutely clean. When it's a resale, there are advantages including a customer base and cashflow from day one.  And we'd still do all the training. But we can't be responsible for existing customers or the terms and conditions the outgoing franchisee might have agreed with them," says Nigel Toplis, the managing director of Recognition Express.

Most franchisors welcome the arrival of a new franchisee as an injection of fresh blood, with all the drive and enthusiasm the right franchisee can bring. "Because you're new to it, you tend to give it so much more than a franchisee who is ready to move on," says Lisa Desborough, Musical Minis' Buckingham franchisee, who waited years for the right resale to come up and now says she wouldn't have it any other way.

And resales can bring huge advantages especially with premises-based franchises. New franchisees can save time since they do not have to negotiate leases, order stock or recruit staff, says Chris Gillam, Mail Boxes Etc's franchise recruitment consultant. "Buying an established franchise may provide a faster return on investment than starting a new venture from scratch, because all the systems and procedures are already in place, enabling a new franchisee to integrate quickly into the marketplace," he argues.

Resales are a win-win situation, says Mr Page: "The essential point to remember with resales is that a good franchisee will always succeed, either turning around an under-performing store or flourishing further in an already profitable business."

There are real advantages to resales, for the right franchisee - like Andy Williams, London-based Pirtek franchisee, who took on his first resale five years ago, and now has four. "A resale gives you that solidity when it comes to bank funding, and when you put that together with a belief in your own abilities it's easy to enhance an underperforming franchise. I'd recommend a resale every time."

Cash Generator

Graeme Mulheron

After 18 years of running a sales and marketing agency, Graeme Mulheron was ready for a change - and while he knew he wanted a Cash Generator franchise because of its multiple income streams and strong franchisor support, he simply assumed he would sign up for a new territory. But when a resale in Luton became available, just 20 minutes from his home, it was too good to miss. Since it was already well established and profitable, Mr Mulheron enjoyed a good income from that first day in 2007. And when the Stevenage resale also became available, he repeated the trick. Both were considered to be underperforming, making it possible for him to negotiate a good price for the franchises, including stock, fixtures and fittings. "Resale franchises can be cheaper than starting with a brand new one," he says.

But prospective franchisees need to use caution, he warns. "Ask why it is up for resale. If it is due to the poor performance of the business, you need to try to ascertain why. Consider its location, perhaps there was a lack of marketing or uncompetitive pricing across all sectors. You can then make a decision on what you feel you can bring to the business."

And the benefits of resales are huge. "As an established business with a good reputation, a resale franchise presents numerous advantages which I have certainly benefited from in both Luton and Stevenage." And though he looked initially for a new territory, when he takes on his third store he will definitely be considering resales.

Recognition Express

Graham Marshall and Jackie Chandler

When long-term partners Graham Marshall and Jackie Chandler decided to invest in the Recognition Express franchise they took over last October, they used the fact that the business was a resale to get to know the franchise thoroughly in advance.

After years as a sales and marketing director, Mr Marshall's philosophy was simple. "Go and work for the selling franchise for a week, as a member of staff," he urges other prospective franchisees. "And don't just follow them around and watch - take part, answer the phone, post an invoice, use the systems. Only by using the processes and systems will you actually know if you can use them and that they work as they should."

Doing it that way is a good means to discovering the down sides. "You may have to adapt to someone else's working practices. In our case, the previous owner had run the business for 10 years and had his own systems and processes. We came in and wanted to change things, but it's difficult when the staff are used to doing things in a certain way."

In fact, it is important to maintain healthy relations with the previous owner (or owners). "Recognition Express is always available to offer support and advice, but it always pays to stay on good terms with the person from whom you're buying the company.

"Our previous franchisees have been so helpful, and we would have been in dire straits on a number of occasions had we not been able to call them. It's important to keep an open dialogue."

Musical Minis

Jayne Stanton

When teacher Jayne Stanton started looking for a business venture that would combine her teaching experience with her love of music, she naturally turned to franchises offering children's music classes - and was delighted to discover that Musical Minis had an up-and-running business for sale in her area.

She went along to classes, and shadowed the outgoing franchisees for six weeks. "I got to know the parents and the children, as well as getting to know how the business worked," she says.

She also did her due diligence, looking in detail at the business and the profits it had made over the previous five years.

The valuation was based on past profits, and she felt there was little need to negotiate - so she became Musical Minis East Midlands East franchisee.

Even with all the help of the outgoing franchisee, she still found that there were new skills to be learned. "Marketing was perhaps the most demanding, though I learned quickly," she says. She has since been setting up new classes, as word of mouth fires the success of the business.

And the support of a good franchisor was just as vital as for a new territory. "Head office are always very helpful indeed, if I have a query or a problem. There are huge advantages of buying a resale, including an established customer base and profitability from day one. I'd recommend it to anyone."

McDonald's

Kalpesh Patel

Investing in existing businesses has been the key to success for Kalpesh Patel, who now runs seven McDonald's restaurants across south west London.

He started as a crew member in a restaurant he now owns but was keen to be his own boss, and the business discipline of working with McDonald's was just right.

"The McDonald's franchisee selection process is pretty rigorous," he admits. "In particular, I think they look for good leaders with a high level of personal integrity, good people management skills, not to mention excellent business and financial acumen." Practical skills were vital too, he adds, since his working life is "emphatically hands on."

In 2008, he was able to expand his business through resale - by buying four nearby restaurants from other franchisees.

"I would say that becoming a McDonald's franchisee is not for everyone. For a start, you need a significant financial investment not to mention the very hands on approach needed to running such a customer-focused business."

But whilst a franchise often commands higher sums as established business with an existing customer base and profitability from day one, the costs are manageable. The cost of an average restaurant is £200,000, he points out, yet while a prospective franchisee needs to provide at least 25% of the value as unencumbered funds, the remaining 75% can be funded through a bank loan with favourable funding terms.

And while some might be put off, the rewards of a successful franchise business are immense, adds the franchisee: with 450 staff, most locally based, Mr Patel is delighted he chose a resale to grow his business.