25 Sep Buying an Established Franchise? Here are the typical under contract steps
Each franchise has its own process for qualifying and onboarding a prospective franchisee. Sometimes it’s rigorous with multiple interviews, steps, forms to be filled out, and documents to be provided. Other times, it’s comparatively relaxed. The degree of scrutiny a candidate undergoes largely depends on the type of business. Nonetheless, many will follow a format similar to the steps presented below.
STEP #1: Initial Call
During the first call with the franchise’s corporate representative, the buyer candidate can expect a high-level conversation about their background, professional experience, and goals for owning a business. The franchise representative will usually take this opportunity to review the financial investment parameters with the candidate.
If the call goes well, the candidate will be invited to complete a detailed personal profile and provide personal financial records.
STEP #2: Personal Profile Review and Background Check
Once they’ve received the completed profile, validated a candidate’s financial capabilities, and run a background check, the corporate office will schedule a more in-depth conversation. During this call, they will discuss with the candidate whether their particular franchise could help them achieve their goals, how a typical office or store operates, what the industry outlook is, and what kind of supporting and training corporate provides its franchise members.
STEP #3: Review of the Franchise Disclosure Document (FDD)
The FDD contains a complete and detailed summary of everything needed to know about the franchise in question, including a comprehensive summary of how its offices perform, growth benchmarks, expansion opportunities, and more.
STEP #4: Validation with Current Franchisees
Some franchises offer qualified candidates the opportunity to speak with other franchisees. This peer-to-peer interaction allows a candidate to hear from someone in their shoes what the challenges and opportunities are of owning and operating such a business.
STEP #5: Discovery Day
Once you have been pre-qualified and have familiarized yourself with the FDD, you may be invited to attend a Discovery Day at the Franchise’s corporate headquarters.
STEP #6: Approval
After Discovery Day, a representative from the franchise’s corporation will typically notify you of your approval status. If both the candidate and the franchise representatives agree that this would be a mutually beneficial relationship, the franchise representative greenlights the process to proceed with the acquisition.
At this stage, their legal department will need to review and approve the Asset Purchase Agreement that you have developed with the business Seller. Their approval allows the Buyer and the Seller to formally execute this document.
Either at Closing or beforehand, the candidate will be required to execute a Franchise Agreement.
STEP #6: The Transfer Fee
When an established franchise business changes hands, the Buyer is expected to pay a transfer fee to the franchise corporation. Whether the Buyer pays all of this fee; it’s split between the Buyer and Seller; or the Seller covers this fee in its entirety is something to be worked out and mutually agreed upon between the Buyer and Seller parties.
Step #7: Training at the Corporate Offices
Some, but certainly not all franchises, require its members to undergo extensive on-site training lasting a week or longer. Mostly commonly, this is a prerequisite for closing, but there are some franchises that allow the training to take place after closing. Your franchise representative and the FDD will inform you the training protocols required by the franchise you’re looking at.