Buying an existing franchise: what to check before arranging finance
Buying an existing franchise means checking the price, the trading figures and the transfer terms. See what to prepare before arranging finance for a resale.
Reading time6 min read
CategoryBusiness guides
Written byThe bizbritain team
Buying an existing franchise means checking two things: the business that is trading and your right to run it. Before you arrange finance, check the seller's figures, the price, the franchise transfer terms and the cash you will need after completion. The franchisor's approval and the lender's decision are separate.
A resale can feel safer than a new territory, because you can see it working. It still needs the same care as any business purchase. It also needs a few checks that only apply to franchises.
Section 01
What is a franchise resale?
A franchise resale is a trading franchise that changes owner. The current franchisee sells the business, and you take over the territory under the same brand.
You are buying more than a business. You also need the right to operate it, and that right comes from the franchisor, not the seller.
So start by finding out what is actually included. That is usually some mix of equipment, stock, customer contracts, staff and the remaining franchise rights. Ask for the list in writing.
A new territory is different. There is no trading history, so a lender looks mainly at you, the brand and your plan. On a resale, the business's own accounts carry much more weight.
Section 02
Buying an existing franchise: check the numbers behind the price
Ask the seller for recent annual accounts and up-to-date management figures. Ask for a list of debts, leases and other commitments too.
Then look at what sits behind the profit. Three questions matter most.
Owner involvement: Does the seller work in the business full time? If you will employ a manager instead, that salary comes out of the profit.
One-off items: Was there a large contract, grant or cost that will not happen again? Take it out to see a normal year.
One unit or several: If the seller runs more than one territory, make sure the figures belong to the unit you are buying.
Talk to other franchisees in the network as well. They can tell you how the brand performs away from the sales pack.
How do you value a franchise resale?
Price usually starts from what the business earns. Guidance published by the British Franchise Association also points to goodwill, contracted income, the territory and how many buyers are interested. It recommends an independent valuation.
Keep three numbers apart. The valuation is what the business might be worth. The price is what you agree with the seller. The amount a lender will support depends on what the business can afford to repay.
In most networks, yes. The franchisor usually has the right to approve a new franchisee. Involve them early, and find out what they need before you agree terms with the seller.
Ask the franchisor these questions.
The agreement: Will you take over the current agreement or sign a new one? How many years are left, and what happens at renewal?
The territory: Is it the same territory the seller has now, and is it exclusive?
Fees: Is there a transfer fee, or a training fee for the new owner?
Investment: Will you need to refurbish, rebrand or replace equipment soon after you take over?
Other people may need to agree too. A landlord may have to consent before a lease passes to you. Some customer contracts may need consent as well. Do not assume every contract moves across automatically.
How you buy also matters. Most sales are either a share purchase or an asset purchase, and each has different tax and legal effects. Take advice from a solicitor and an accountant who know franchising.
Section 04
Is the price the same as the money you need?
No. The price is only one part of the total. Add up four things.
The purchase price
What you pay the seller for the business and everything that comes with it.
The costs of the deal
Legal fees, accountancy, any valuation, and any franchise transfer or training fee.
Investment after you take over
Any refurbishment, new equipment or rebranding the franchisor requires.
Working capital
Cash to pay wages, rent, royalties and suppliers while customer payments come in.
Can a profitable resale still need working capital? Yes. Profit shows up in the accounts over a year, but cash arrives week by week. You may pay staff and suppliers before customers pay you, especially in your first months as owner.
Map when each payment falls due. Some costs land before completion, some on the day and some in the first few months.
Some sellers will take part of the price later. This is called deferred payment. It can depend on the business hitting targets, which is known as an earn-out. Do not build your plan around it until the seller has agreed in writing.
Be realistic about borrowing. A lender will look at whether the business can afford the repayments from what it earns. Borrowing more than it can comfortably repay puts the business under strain from the first day.
Section 05
Prepare your resale finance pack
A lender, the franchisor and your advisers will ask similar questions. Gather the answers in one place. For each one, note who supplies the evidence and what is still open.
Is the business trading as described?
The seller supplies recent accounts, management figures and a list of debts. Note anything they cannot yet explain.
Will the franchisor approve you?
The franchisor supplies its requirements, the transfer terms and any fees. Note whether approval is still pending.
Can you stay in the premises?
The seller and the landlord supply the lease and any consent to transfer it. Your solicitor confirms what is still to be agreed.
What must you spend after completion?
The franchisor sets out any refurbishment or equipment it requires. Get the cost and the deadline in writing.
Can the business afford the repayments?
This one is yours. Build a forecast for the business under your ownership, including the new repayments. Mark which figures are estimates.
Once you have the price, the figures and the franchisor's position, you are ready to look at funding for a franchise resale. Tell us about the franchise you want to buy, the price and what you can put in yourself. We can help you understand the funding options and what to prepare.
Bring in a solicitor and an accountant before you sign anything. They will check the agreement, the lease and the structure of the deal. They can also arrange a professional valuation if you need one.
This guide is general information, not financial advice. Applications are subject to status, affordability and lender criteria.
Got a question the guide didn’t answer? Talk to an advisor.
Starting your first franchise, buying an established franchise or adding another location? If you’ve read the guide, our advisors can help you understand the funding options and prepare your next step.