What are franchise resales? These are open and operating highly desirable brand name restaurants that were developed and launched by the first owner. They took the initial risk to identify the need in the marketplace for this national brand. They located a new site and in most instances, committed large amounts of capital to build the new location. When that operator decides to sell, these opportunities are called franchise resales.
The franchise industry is a robust and growing environment. There are more than 740,000 franchise establishments open in the United States as of 2021, an increase from the prior year. Those franchise establishments will produce $892 billion dollars in output, an increase over the prior year of $52 billion dollars.
Franchise restaurants are massive drivers to the economy in terms of their employment as well. Direct employment in the franchise industry is forecast to hit 9.1 million people in 2016, a growth rate of 3.1% over 2015. Roughly 65% of those employed in franchising are in the Food and Hospitality Sector with 38% in the Quick Service Restaurant Industry, 13% in Full Service Restaurants and the balance split between Retail Food (6%) and Lodging (8%).
Specialization in franchise resales is a relatively new phenomenon among brokers since there are several factors contributing to the current turnover of franchise restaurants. It’s a very attractive time to buy a franchise resale and this report will help you understand why.
This Guide to Buying a Franchise Restaurant is designed to help you, the franchise restaurant buyer, make a smarter, more informed decision among the many resale opportunities on the market.
All major brands in America have franchise resales available. The International Franchise Association estimates that as many as 5% to 10% of any brand's inventory will be on the market at any given time. These franchise resales create amazing opportunities for restaurant buyers. The original owners spend anywhere from $250,000 on the low end to up to $650,000 on the high end to build a new franchise location. When they sell it, they can no longer command the price for their original investment as franchise resales trade in one of two ways.
First, franchise resales are priced on a multiple of earnings. A restaurant broker analyzes the profit and loss of the business to recast it into Seller's Discretionary Earnings (SDE) or Owner Benefit. This is the amount a new owner or operator would net from running the business himself. Why do we use this model? It is the same model used by the SBA or Small Business Association to establish valuations for lending and thus, creates the ability for us to compare businesses on the same basis across multiple opportunities.
Secondly, franchise resales are priced based on the value of their assets. This is used when the business is not cash flow positive and is typically referred to as an "asset sale." The value will be discounted from their original investment since the assets are no longer new. Owners of franchise resales looking to get what they invested in their business will be disappointed by the actual value of the business valued in this manner. They may have invested $350,000 to build out a brand name sandwich shop restaurant but it will only sell for around $99,000 at the discounted value. These are huge opportunities for buyers seeking low cost franchise resales.
What causes someone to resell their restaurant, creating these franchise resales? There are a number of reasons but here are the top five reasons the restaurant at We Sell Restaurants see franchise resales come into the marketplace.
Owners that prefer to Build versus Operate
The skill set that many owners bring to the table when building a new location are very different from those of an onsite owner and operator. The building of a new location focuses on project management. Just like building a house, building a new franchise location is a multi-month (sometimes multi-year) undertaking. They are meeting with leasing representatives, finding the right location, establishing their business entity, arranging their financing and doing all types of tasks that have a finite beginning and end. They often find themselves very enamored with the process of building but once the doors are open, they must shift to daily management and people oversight versus project management. For many, it is not as interesting to operate the business. These locations become franchise resales.
The failure of partners to get along is the second reason the restaurants brokers see franchise resales hit the marketplace. Partners who go into business together because they love a concept start with good intentions that don't always play out. Just like marriages (where one in two end in divorce), partnerships are not easy. One partner will inevitably get a new job opportunity. There may be an inequity in workload where one side or the other is doing the heavy lifting, creating an imbalance. Eventually, with the stress of operations, partnerships sour. That's the second main reason franchise resales.
According to this article in Forbes Magazine, "In 2011, baby boomers started turning 65, and from now until 2030, that number will swell by 10,000 each day. That’s 70,000 per week and over 280,000 per month." Baby boomers have some of the vastest financial holdings of any generation, including businesses. These retirees are selling these money making and valuable assets, creating more franchise resales. That is the third reason franchise resales are being created, creating opportunity for restaurant buyers.
Great Grandchildren Trading Concepts
The business model for franchising began in the 1950's, just as the interstate highway system was being developed. Americans wanted commonality and consistency when they traveled the U.S., so the idea of the same brand at every highway exit, led to a boom in the franchise model. Early adopters of franchising may have begun with one unit, but the value and earnings may have led them to launch and operate several more. Their children (baby boomers), inherited these strong concepts and in many cases, added on more units of these legacy brands.
The children of baby boomers are Millennials, also known as the "me" generation. Now that their parents are retiring, they are often either not interested in the restaurant business or in some cases, want to trade legacy brands, for newer, "cooler" concepts. These may be concepts they view as more "green" or more "socially conscious" or they may simply be newer concepts (think frozen yogurt versus hamburgers) but in any event, this group is putting their franchise resales on the market as they pursue other interests.
Lifecycle of the Agreement
The actual ownership cycle may dictate that more franchise resales come onto the market. A typical franchise agreement is ten years in length and then subject to renewal. When a brand is dubbed, "Hot Concept" and people rush in over a short period of years, creating a bubble of owners over a two to three year period. When their typical 10-year agreement is ready to renew, they may be ready to try something else or not be willing to do the remodel or refresh required at that point. For many, they simply see ten years as enough, especially if they have operated profitably. It is a natural window to reassess in the year or so before renewal and move on to a new opportunity or retire.
Finding franchise resales that are on the market is often not as easy as approaching the brand themselves. Many do not work with their franchise owners on franchise resales as their development team is focused on new stores, not existing ones. The best source of franchise resales is a brand like We Sell Restaurants which has relationships with national brands and represents most of the units nationwide. Our inventory of franchise resales is found on this page or online at WeSellRestaurants.com
Franchise resales are a great opportunity to acquire a business with strong brand recognition, established earnings and a well known location in the market. For many, it is the fastest and easiest path to restaurant ownership.
Here are three of the big items that buyers frequently want to negotiate and the reality of reaching new deal terms on each one from an experienced Restaurant Broker.