What are the advantages of investing in a franchise resale?

There are two ways in which you can become involved in operating a franchised business.  The first is to enter into an agreement with the franchisor to take a territory or site where no other franchisee currently operates.  The attraction of this approach is that the cost of taking a franchise in this situation is likely to be lower than the cost of acquiring an existing profitable franchise business but you will need working capital because, in the early days, you will have very few customers and therefore your turnover may be lower than your outgoings.

The second alternative is to acquire an existing franchise business from a franchisee who wants to leave the network. Here you take on all of the franchisee’s business assets and employees but you would, from day one, have an existing business. What you would have to pay depends on whether the business you acquire is profitable.  If it is, you would generally expect to pay two and a half times the annual profits earned by the franchise business before tax and before deducting any payments (whether dividends or salaries) to the franchise owner. Sometimes in addition you may have to pay for the value of the assets being transferred.  If the business is not operating profitably you would generally only pay a nominal sum or a sum that reflects the value of the assets being transferred.