Why Franchisees Want to Sell to Franchisees

This creates an unfair opportunity for insiders

A franchisee wants to sell their business.

Which sounds like a better buyer:

A) An outsider with no experience, who will ask a million questions, must get approved by the franchisor and may fumble at the 5-yard line.

B) A neighboring franchisee you've known for years understands the business, is already approved for expansion, and has a solid track record.

Most franchisees want to sell to other franchisees.

Unfair Competitive Advantage

This "zee to zee" preference gives growth-mode franchisees an unfair competitive advantage.

As a franchisee, you have a database with the names, locations, contact info, and sales of 20 to 500+ small business owners (aka fellow franchisees)

Step 1: Put together a spreadsheet to track potential acquisitions:

  • Low-performing multi-units

  • Low-performing single units

  • Franchisees near retirement

  • Franchisees who are super negative

  • Franchisees who have other priorities

  • Franchisees who are spread out geographically

The list goes on.

Step 2: Establish a relationship with each one

We helped my buddy Ted buy an existing senior care franchise this year. Ted has a multi-year plan to roll up the neighboring franchisees since they are also near retirement age.

Last month, he got a client who lives near the border of his neighboring franchisee's territory.

Unfortunately, he has trouble finding staff there and can only cover 2 of the 5 days the client needs. Ted asks his neighboring franchisee if he can staff the other 3 days, which he can.

This is a win-win-win-win scenario

1) Client wins by getting the care they need

2) Neighbor franchisee gets $$ handed to him

3) Ted wins because 2 days > 0 days if the client goes to a competitor

4) Ted wins again by strengthening the relationship with that franchisee

Who do you think the neighboring franchisee will call first when ready to sell?

You could start by simply grabbing coffee. Send an application for a strong candidate that you don't need or lives closer to them. Share a best practice or ask for advice on a challenge.

The stronger the relationship you can establish, the better.

Step 3: Plant the seed

From there, plant the seed.

Strike up a conversation about expansion. You will customize the conversation based on what you know about them:

  • "What are your expansion plans?"

  • "My goal is to acquire X units over the next Y years."

  • "Do you know any owners who may want to sell soon?"

  • "We should chat when you are ready to sell."

I was the only person the seller talked to in almost every acquisition.

Step 4: Franchisor Pre-Approval

Franchisors must approve of every sale.

Getting a deal denied at the finish line would be incredibly frustrating.

Every franchisor has a different appetite for franchisee growth. This is critical to understand before you buy into a franchise. Some require a one-year minimum before you can expand. Some require sales & other performance metrics to be met before expansion.

Some franchises like Chick-fil-A & UPS Store limit franchisees to 2 or 3 locations. They don't want big operators.

In other cases, the franchisor encourages growth. I've been handed deals on a silver platter.

Once you're a franchisee and ready to expand, set a meeting with the franchisor expansion decision maker. Find out what you need to do to get their blessing.

Outsider Tips to Break In

If I were an outsider wanting to buy an existing franchise, here's what I'd do:

Step #1 Start with the brands

The first step is to identify the right franchise brand for you. Find a brand that matches your goals, skills, budget & location.

You also sign a 10+ year franchise agreement when buying an existing business.

The best deal in the world could be a terrible investment if the franchisor is trash.

Step #2 Cold Calling & Door Knocking

Many franchisees would sell if someone appeared on their doorstep wanting to buy it. These businesses aren't officially for sale.

1) Figure out the names of all the local franchisees using the FDDs, Google, LinkedIn, etc.

2) Cold call, cold email, and door knock to meet the owners

3) Be friendly & build a relationship

This process takes a lot of time. I'd recommend hiring a virtual assistant from the Philippines to help go through all the data crunching.

Step #3 Understand why no franchisees want to buy it

You need to dig into this. There are a couple of reasons:

  • Near retirement - neighboring franchisees could also be thinking about retirement.

  • Poor performance - other franchisees are struggling. They want to fix their current business before taking on more.

  • Overpriced - they are asking a price that no other franchisee is willing to pay

  • Location/market - other franchisees believe something about the location/market that turns them off

  • Not interested - other franchisees could not be interested in expanding. They are happy with their current size & don't want to take more.

In Ted’s deal, it’s a great brand in a great market. The neighboring franchisees are also near retirement & weren’t interested in expansion.

Crumbl Cookie was crushing it a few years ago. Today, locations all over the country are for sale. Many franchisees feel the demand for $5 cookies has peaked and are looking to cash out. The buyer better be prepared to catch that falling knife.

Step #4 Learn as much as you can

I've never asked for a tax return when buying a shop.

I've acquired multiple locations without asking for a P&L.

I don't need to. I already know the current sales. I can estimate the future sales. Given our pricing matrix, compensation plans & overhead, I know what our margins will be.

As an outsider, learn as much as you can. Invest time into learning, talking to other industry experts, watching YouTube videos, reading through FDDs, etc.

Thorough due diligence is essential. The worst thing you can do is to take on a bunch of debt & sign a 10-year franchise agreement on a pile of poo.

Build Then Buy

Buying an existing franchise as an outsider is not easy.

An alternative is taking the “build then buy” approach.

You start by finding a brand you love. One that matches your goals, skills, budget & location. You sign a development agreement to build 1 to 5 units from scratch.

You can start building relationships with fellow franchisees once you’re a club member.

Once you learn the business, start implementing the roll-up strategy (the “buy” step) by acquiring other franchisees.

This works in both emerging & legacy brands.

Next Steps

Investing in a franchise is a huge, potentially life-changing commitment. It's essential to find the best franchise for you.

My team can help you find that franchise. Book a free discovery call here

I've created a FREE Franchise Due Diligence course. Click here to sign up

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