Resale can give best bang for your buck
Several advantages to buying an established business from an existing franchisee
Kumar Yogaretnam began as a dishwasher 30 years ago with food services giant Cara Operations Limited and worked his way up the company ladder to corporate training executive. In 2009, he made the leap from employee to owner by buying from Cara a Swiss Chalet franchise he had previously managed. Today, Yogaretnam owns nine Swiss Chalet franchises as well as two Harvey’s locations and one each of Kelsey’s, Montana’s and East Side Mario’s. (All are Cara brands.) Most are in the GTA but his mini-empire extends as far as Windsor and North Bay. He acquired all of them as resales rather than startups.
For one restaurant, Yogaretnam paid $1.8 million. The others averaged $800,000 to $1 million.
“They are great value,” he says. “One year, we acquired four or five, the rest gradually. We were very successful doing a turnaround management, bringing our passion into the brand and making the restaurants profitable.”
Yogaretnam is among the minority of franchisees who invest in a resale — known as a refranchise — rather than a startup. A&W Food Services of Canada Inc., which has 840 franchises nationwide, has a turnover in ownership of 5 per cent annually.
“Often those restaurants are picked up by existing franchisees,” says Mike Atkinson, regional vice-president for Eastern Canada for A&W Food Services.
Much of the process in a resale is the same as in the purchase of a new location. But there are several advantages a franchisee stands to gain in a resale.
“There’s an established customer base and established cash flow,” says Gary Prenevost, senior franchise consultant at FranNet LLC in Mississauga. “It doesn’t take a year to build the base. The staff is already in place and fully trained. The buyer has access to a performance history to base the purchase decision on.”
Furthermore, the incoming franchisee is entitled to the franchisor’s disclosure document in the five provinces (Alberta, Ontario, P.E.I., New Brunswick and Manitoba) where franchise law requires one to be made available.
The disclosure document reveals the franchisor’s financial statements; whether the franchisor is being sued and whether there are renovation requirements, which often arise on a resale.
The process in a resale differs from that of acquiring a new franchise. The offer to purchase is made to the existing franchisee, not to the franchisor. But the franchisor still has final approval over the incoming franchisee.
Franchises are valued on the basis of future cash flow. It’s essentially a bet that the business will continue to generate earnings at a level that will justify the cost of acquiring it. In a successful system, a resale fetches three to five times EBITDA (earnings before interest, tax, depreciation and amortization).
Of course, the incoming franchisee usually hopes to increase sales and to control expenses better than the previous franchisee.
“All of my restaurants are more successful now than they were when I bought them,” Yogaretnam says. As an incentive, he offers the general managers at several of his locations a 15 to 20 per cent minority interest in the franchise.
While a successful location usually fetches a premium, there are times when a refranchise can sell at a discount. “But,” cautions Prenevost, “you’ll never know for sure why the existing franchisee is really selling.”