Buying an existing UK franchise
You may think you have to start a franchised business in the UK from scratch but this is not always the case. Many existing UK franchisees are looking to sell their franchise. There are many reasons that this could happen:
• The franchisee could be very successful and wants to sell a profitable business
• The franchisee may simply be retiring
• Some UK franchisees realise that the type of business they are in is just not for them and want to move to something new
Buying an existing franchise is becoming a sensible and safer option as a way into starting a business. It has many advantages such as:
• The ability to generate profits at an earlier stage
• Guaranteed income from day one
• Not having to go through the initial set-up, which is the riskiest time
• An established customer base and public acceptance
• Easier to make financial projections as you have all the past records
• Starting with trained/qualified staff
• Starting with established suppliers
You have to bear in mind that when you buy a franchise resale you may be paying more upfront investment as you will be buying the goodwill of the business.
It is important to remember buying a franchise resale does have some drawbacks, for example the existing franchisee may have old premises and equipment, which you may have to modernise. There are also existing businesses, which have, been allowed to deteriorate and winning back former customers can be very difficult.
Valuation of the resale business
The sale and purchase is based on the value of the assets and goodwill of the business. Normally, the value of the assets is based on their realisable value i.e. what the assets could be sold for in the open market, whereas goodwill is normally based on the future profit potential of the business. The price is the amount that a willing buyer will pay to a willing seller. Often this is a multiple of the business profit but getting to the right multiple is the skill and will vary from industry to industry.
An investor purchasing a resale should expect to recoup their initial investment together with a return based on the increased value they achieve for the business during their period of ownership. A starting point is to look at the return on investment; if you are looking for 20% (to reflect the risk of investing in the business) then this would equate to a multiple of 5 times profit (i.e. you might invest £200K for a return of £40K).
It's never as easy as this in practice as you need to look at the maturity of the business, its dependence on key customers or staff, the assets employed and so on.
If you need help in valuing a business you can take advice from an experienced accountant.
