Seeking professional advice when buying a business
In this guide:
- Conducting research when buying a business
- Potential problems when buying a business
- How to assess a company's assets
- Legal and financial checks when buying a business
- Employees, IT and environmental checks when buying a business
- Confidential information and confidentiality agreements
- Seeking professional advice when buying a business
Potential problems when buying a business
Be aware of potential issues that may affect your purchase of an existing business.
Before buying a business, you should look out for any potential issues that may affect your purchase.
The reason for selling the business
Find out from the business owner why the business is on sale. If they don’t want to disclose this information, this could be cause for concern.
If the owner’s reason to sell the business is related to financial problems, you may want to reconsider the offer. See make sure a business is worth buying: due diligence.
Financial situation
The financials of the business are one of the most important indicators that will help you determine if your investment is safe.
It is sensible to take advice from professionals with experience of valuing businesses and their assets, such as accountants and solicitors. See legal and financial checks when buying a business.
Credit scores and outstanding debts
Lenders won't be willing to finance a purchase that represents a high level of risk so if the business has financial problems, you probably won’t be able to get a loan.
You want to make sure the business you purchase is free of debts. Using a credit agency will provide you with access to databases with up-to-date financial information. You can find out the credit-worthiness of a business with Equifax or Experian.
Employee turnover
High employee turnover indicates underlying problems, such as poor employee management, a negative work environment, poor salaries, or difficulty attracting and retaining good employees.
Employee satisfaction is key, as they are going to be your support in the business following the transaction. See factors affecting staff turnover.
Business model structure
You should be aware of the overall structure of the business. The reasons behind the apparent success of the company may be tied to the owner rather than good management of the company.
Although the company may have enjoyed stability, it might not be prepared for future changes in the industry. You need to analyse whether the foundations of the company are solid, even when you take some factors out of the equation.
Condition of included assets
You need to know exactly what assets are going to be included in the business acquisition.
You should look carefully at the condition of the physical and intangible items of your purchase.
Company reputation
Look into the reputation of the company and the general opinion of customers towards it.
You can gain a better understanding of how people see the business by looking at Google reviews, social media posts, testimonials, and other sources.
Legal issues
A company that has past legal issues may not be the best option when buying a business. There may be some underlying issues that are not so easy to spot.
Consider the help of a solicitor to ensure the company you are about to buy complies with required licenses and regulations, collection of customer data according to UK General Data Protection Regulation, and has its contracts in place.
Trustworthiness of owner
If an owner is un-cooperative, or reluctant to disclose information about the business, this could mean they are withholding information that could affect you.
Another cause for concern is when the business owner puts pressure on you to close the deal. They should give you a proper amount of time to carefully conduct due diligence and examine every detail of the business you are about to purchase.
If you have encountered one or more of the issues above, it doesn’t necessarily mean that you shouldn’t go ahead with the purchase. However, you should analyse your options and obtain legal advice. See choose a solicitor for your business.
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How to assess a company's assets
Decide which assets you want to buy from the business and check the seller's intentions as regards those assets.
Once you have found a business you are interested in, the first thing you should do is find out exactly what is for sale, or decide which parts of the business you are interested in buying.
You may agree to purchase the whole business or just its assets, ie its equipment, stock and order book. If you only wish to buy the assets, you will need to determine whether the seller will sell them with or without compensation due to loss of tax benefits, for example from a share sale.
What you need to check when buying a business
Whether you want to make an offer to buy the whole business or to purchase just its assets, there are several important things to check, including:
- Whether the business has full legal ownership of all key assets such as plant, equipment and property. Ask to see documentation that proves all equipment and stock you are purchasing has been fully paid for and is not purely leased by the business - for example, check computer software licenses.
- If it has warranties and guarantees for any major pieces of equipment included in the deal such as computers, photocopiers, vehicles, etc.
- Whether any intellectual property is protected and registered. The Intellectual Property Office or a patent lawyer can help you check.
- What supplier and key customer contracts involve. Make sure you understand what these legally require from the business.
You will then need to decide how much these assets are worth, although to value the business as a whole you will also need to look at documentation such as its profit and loss account.
The above list is not exhaustive. There may be other things you need to check depending on the business you are considering buying.
It is sensible to take advice from professionals with experience of valuing businesses and their assets, such as accountants, lawyers, chartered surveyors, business transfer agents, business brokers and corporate financiers.
How to access company information from Companies House
If the company is registered with Companies House, you can also obtain copies of the company accounts, the annual return and the other key documents filed by your target business using the GOV.UK Find and update company information service.
Also on this siteContent category
Source URL
/content/how-assess-companys-assets
Links
Legal and financial checks when buying a business
Learn about the financial and legal checks you should make when considering buying a business.
When considering buying a business, ask the vendors for any information you wish to see. They should be happy to provide this, although you may have to sign a confidentiality agreement. The seller will want to protect certain aspects of the business, so some information may be off limits until close to completion - despite your signing of a confidentiality agreement.
The legal and financial items to check and where to get help with these include:
Information about the business
- Check the vendor has the legal right to sell the business as there may be more than one decision-maker involved. If the business is a company registered at Companies House you will be able to get the necessary information from Companies House. Find and update company information service.
The original business plan
- Ask the vendor to see the original business plan. This will outline issues such as start-up finance which may notify you of any outstanding loans, for example.
Financial commitments
- Examine the business' accounts, including the detailed management profit and loss account and balance sheet. These and other documents may be available from Companies House if the business is legally formed as a company. Find and update company information service.
- Ask for documentation regarding outstanding loans and debts. Get your accountant to look at any financial details.
Ownership of assets
- Check the business has legal ownership of its key assets and determine what the terms and conditions are for these assets. Ask your solicitor to check the property deeds for premises owned by the business, for example, or ask for the rental agreement and speak to the landlord if you want to continue to operate the business from its current premises.
- You should also ask for information and documentation regarding the business' current employees, IT infrastructure and other technology as well as any issues relating to the environment.
Legal actions
- Check with the Northern Ireland Courts and Tribunals Service for court cases or late-payment actions being taken against or by the business that could affect its finances or reputation.
Seek professional advice
It is sensible to take advice from professionals with experience of valuing businesses and their assets, such as accountants, lawyers, chartered surveyors, business transfer agents, business brokers and corporate financiers. See seeking professional advice when buying a business.
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Source URL
/content/legal-and-financial-checks-when-buying-business
Links
Employees, IT and environmental checks when buying a business
What you need to know about a business' employees, IT systems and environmental responsibilities before buying it.
Responsibility to existing employees
One of the key considerations when thinking about buying a business is its existing employees. Normally a new business owner has to continue to employ the existing staff on their current terms and conditions under rules known as the Transfer of Undertakings (Protection of Employment) Regulations (TUPE). Understand your responsibilities to employees if you buy or sell a business.
Your main concern when assessing a business in the first instance is how much the current terms and conditions are going to cost on an annual or monthly basis. To do this you should:
- Ask to see copies of employee contracts. However, you need to remember that these may differ for different levels of employee.
- Look at employee costs such as the monthly wage bill, National Insurance contributions, pension contributions and any other benefits. This may include company cars, health insurance, gym membership, travel loans etc.
Remember any documents you see are highly confidential. Many of the business' employees may not know the business is up for sale. Once you have bought a business you need to comply with TUPE and other employment laws.
IT and other technology
A business' IT system is often vital to its smooth running. You will therefore want to consider how old any systems and equipment are and whether it is being sold as part of the deal. You will need to ask questions such as:
- What is the value of the IT equipment and other technology?
- Are these assets under guarantee?
- What is included? Does it all belong to the business?
- Are there ongoing IT maintenance and service agreements/contracts essential to the business?
- What contingency plans does the business have in place for data loss? Does it have policies and procedures in place? Who has access to this data?
The environment
Another consideration will be the business' effect on the environment. Depending on the business sector it may have to pay environmental taxes and have other obligations in this area. If you think the business may be affected, contact the Northern Ireland Environment Agency (NIEA).
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Source URL
/content/employees-it-and-environmental-checks-when-buying-business
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Confidential information and confidentiality agreements
Understand your legal obligations when buying an existing business.
Much of the information you'll want to know about a business you are hoping to buy will be confidential, while some will be publicly available.
Information such as employee and customer records, for example, will be protected under the General Data Protection Regulation (GDPR) and the Data Protection Act 2018, while other details will just be commercially sensitive. See UK General Data Protection Regulation (UK GDPR).
If a vendor is keen to sell then they should co-operate fully and give you all of the information you need to arrive at an offer. This may include looking at bank loan details, property rental contracts and intellectual property licences, for example.
Confidentiality agreement
It is likely you will be asked to sign a confidentiality agreement (see non-disclosure agreements). This protects the existing business owner and stops you from using any information you have learned about the way the business is run should negotiations breakdown.
You should seek professional advice by getting a solicitor or lawyer to read anything you are asked to sign or check carefully for any clauses that could have a negative impact on any other businesses you own or are considering starting. You may already be looking at developing a product similar to one offered by the business, for example, and the confidentiality agreement may prevent you doing this if the deal falls through. See choose a solicitor for your business.
Once a business has been purchased it is important to respect the Data Protection Act for any information transferred to you under the sale, such as employee records and client information. It is wise to seek expert legal advice or speak to the Information Commissioner's Office (ICO) to ensure you operate within the law. Follow the ICO's guidance on information and data protection for organisations.
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Source URL
/content/confidential-information-and-confidentiality-agreements
Links
Seeking professional advice when buying a business
Information on potential sources that help when buying a business.
There are many different advisers that can help when buying a business but if you are buying a registered company you can do some checks yourself.
It is possible to obtain copies of a company's accounts, annual return and other key documents. Find and update company information service.
Seeking expert advice
Other professionals worth contacting for expert advice include:
- Business transfer agents, business brokers or corporate financiers can help you through the process of due diligence from start to finish for a fixed fee or percentage of the sale price.
- A solicitor or lawyer will be able to help by looking at any legal contracts, including property deeds, for example. Choose a solicitor for your business.
- An accountant will be able to help you by looking at the business' finances, such as profit and loss accounts. Choose an accountant for your business.
- You can get help with intellectual property protection issues. An intellectual property agent will be able to search for any intellectual property licences the business holds. The Intellectual Property Office can also carry out searches on existing patents.
- A chartered surveyor will be able to help you assess the value of the business' property.
Ensure advisers have relevant professional experience
It is essential that the advisers you choose are experienced in business transfers and valuations.
Word of mouth is the best way to find a good adviser. Always ask any potential adviser about the last five deals they have worked on in the relevant sector and ask for references from previous clients.
You should also check that your advisers hold any necessary qualifications or certification and are members of relevant associations or trade bodies.
Content category
Source URL
/content/seeking-professional-advice-when-buying-business
Links
How to assess a company's assets
In this guide:
- Conducting research when buying a business
- Potential problems when buying a business
- How to assess a company's assets
- Legal and financial checks when buying a business
- Employees, IT and environmental checks when buying a business
- Confidential information and confidentiality agreements
- Seeking professional advice when buying a business
Potential problems when buying a business
Be aware of potential issues that may affect your purchase of an existing business.
Before buying a business, you should look out for any potential issues that may affect your purchase.
The reason for selling the business
Find out from the business owner why the business is on sale. If they don’t want to disclose this information, this could be cause for concern.
If the owner’s reason to sell the business is related to financial problems, you may want to reconsider the offer. See make sure a business is worth buying: due diligence.
Financial situation
The financials of the business are one of the most important indicators that will help you determine if your investment is safe.
It is sensible to take advice from professionals with experience of valuing businesses and their assets, such as accountants and solicitors. See legal and financial checks when buying a business.
Credit scores and outstanding debts
Lenders won't be willing to finance a purchase that represents a high level of risk so if the business has financial problems, you probably won’t be able to get a loan.
You want to make sure the business you purchase is free of debts. Using a credit agency will provide you with access to databases with up-to-date financial information. You can find out the credit-worthiness of a business with Equifax or Experian.
Employee turnover
High employee turnover indicates underlying problems, such as poor employee management, a negative work environment, poor salaries, or difficulty attracting and retaining good employees.
Employee satisfaction is key, as they are going to be your support in the business following the transaction. See factors affecting staff turnover.
Business model structure
You should be aware of the overall structure of the business. The reasons behind the apparent success of the company may be tied to the owner rather than good management of the company.
Although the company may have enjoyed stability, it might not be prepared for future changes in the industry. You need to analyse whether the foundations of the company are solid, even when you take some factors out of the equation.
Condition of included assets
You need to know exactly what assets are going to be included in the business acquisition.
You should look carefully at the condition of the physical and intangible items of your purchase.
Company reputation
Look into the reputation of the company and the general opinion of customers towards it.
You can gain a better understanding of how people see the business by looking at Google reviews, social media posts, testimonials, and other sources.
Legal issues
A company that has past legal issues may not be the best option when buying a business. There may be some underlying issues that are not so easy to spot.
Consider the help of a solicitor to ensure the company you are about to buy complies with required licenses and regulations, collection of customer data according to UK General Data Protection Regulation, and has its contracts in place.
Trustworthiness of owner
If an owner is un-cooperative, or reluctant to disclose information about the business, this could mean they are withholding information that could affect you.
Another cause for concern is when the business owner puts pressure on you to close the deal. They should give you a proper amount of time to carefully conduct due diligence and examine every detail of the business you are about to purchase.
If you have encountered one or more of the issues above, it doesn’t necessarily mean that you shouldn’t go ahead with the purchase. However, you should analyse your options and obtain legal advice. See choose a solicitor for your business.
Also on this siteContent category
Source URL
/content/potential-problems-when-buying-business
Links
How to assess a company's assets
Decide which assets you want to buy from the business and check the seller's intentions as regards those assets.
Once you have found a business you are interested in, the first thing you should do is find out exactly what is for sale, or decide which parts of the business you are interested in buying.
You may agree to purchase the whole business or just its assets, ie its equipment, stock and order book. If you only wish to buy the assets, you will need to determine whether the seller will sell them with or without compensation due to loss of tax benefits, for example from a share sale.
What you need to check when buying a business
Whether you want to make an offer to buy the whole business or to purchase just its assets, there are several important things to check, including:
- Whether the business has full legal ownership of all key assets such as plant, equipment and property. Ask to see documentation that proves all equipment and stock you are purchasing has been fully paid for and is not purely leased by the business - for example, check computer software licenses.
- If it has warranties and guarantees for any major pieces of equipment included in the deal such as computers, photocopiers, vehicles, etc.
- Whether any intellectual property is protected and registered. The Intellectual Property Office or a patent lawyer can help you check.
- What supplier and key customer contracts involve. Make sure you understand what these legally require from the business.
You will then need to decide how much these assets are worth, although to value the business as a whole you will also need to look at documentation such as its profit and loss account.
The above list is not exhaustive. There may be other things you need to check depending on the business you are considering buying.
It is sensible to take advice from professionals with experience of valuing businesses and their assets, such as accountants, lawyers, chartered surveyors, business transfer agents, business brokers and corporate financiers.
How to access company information from Companies House
If the company is registered with Companies House, you can also obtain copies of the company accounts, the annual return and the other key documents filed by your target business using the GOV.UK Find and update company information service.
Also on this siteContent category
Source URL
/content/how-assess-companys-assets
Links
Legal and financial checks when buying a business
Learn about the financial and legal checks you should make when considering buying a business.
When considering buying a business, ask the vendors for any information you wish to see. They should be happy to provide this, although you may have to sign a confidentiality agreement. The seller will want to protect certain aspects of the business, so some information may be off limits until close to completion - despite your signing of a confidentiality agreement.
The legal and financial items to check and where to get help with these include:
Information about the business
- Check the vendor has the legal right to sell the business as there may be more than one decision-maker involved. If the business is a company registered at Companies House you will be able to get the necessary information from Companies House. Find and update company information service.
The original business plan
- Ask the vendor to see the original business plan. This will outline issues such as start-up finance which may notify you of any outstanding loans, for example.
Financial commitments
- Examine the business' accounts, including the detailed management profit and loss account and balance sheet. These and other documents may be available from Companies House if the business is legally formed as a company. Find and update company information service.
- Ask for documentation regarding outstanding loans and debts. Get your accountant to look at any financial details.
Ownership of assets
- Check the business has legal ownership of its key assets and determine what the terms and conditions are for these assets. Ask your solicitor to check the property deeds for premises owned by the business, for example, or ask for the rental agreement and speak to the landlord if you want to continue to operate the business from its current premises.
- You should also ask for information and documentation regarding the business' current employees, IT infrastructure and other technology as well as any issues relating to the environment.
Legal actions
- Check with the Northern Ireland Courts and Tribunals Service for court cases or late-payment actions being taken against or by the business that could affect its finances or reputation.
Seek professional advice
It is sensible to take advice from professionals with experience of valuing businesses and their assets, such as accountants, lawyers, chartered surveyors, business transfer agents, business brokers and corporate financiers. See seeking professional advice when buying a business.
Also on this siteContent category
Source URL
/content/legal-and-financial-checks-when-buying-business
Links
Employees, IT and environmental checks when buying a business
What you need to know about a business' employees, IT systems and environmental responsibilities before buying it.
Responsibility to existing employees
One of the key considerations when thinking about buying a business is its existing employees. Normally a new business owner has to continue to employ the existing staff on their current terms and conditions under rules known as the Transfer of Undertakings (Protection of Employment) Regulations (TUPE). Understand your responsibilities to employees if you buy or sell a business.
Your main concern when assessing a business in the first instance is how much the current terms and conditions are going to cost on an annual or monthly basis. To do this you should:
- Ask to see copies of employee contracts. However, you need to remember that these may differ for different levels of employee.
- Look at employee costs such as the monthly wage bill, National Insurance contributions, pension contributions and any other benefits. This may include company cars, health insurance, gym membership, travel loans etc.
Remember any documents you see are highly confidential. Many of the business' employees may not know the business is up for sale. Once you have bought a business you need to comply with TUPE and other employment laws.
IT and other technology
A business' IT system is often vital to its smooth running. You will therefore want to consider how old any systems and equipment are and whether it is being sold as part of the deal. You will need to ask questions such as:
- What is the value of the IT equipment and other technology?
- Are these assets under guarantee?
- What is included? Does it all belong to the business?
- Are there ongoing IT maintenance and service agreements/contracts essential to the business?
- What contingency plans does the business have in place for data loss? Does it have policies and procedures in place? Who has access to this data?
The environment
Another consideration will be the business' effect on the environment. Depending on the business sector it may have to pay environmental taxes and have other obligations in this area. If you think the business may be affected, contact the Northern Ireland Environment Agency (NIEA).
HelpAlso on this siteContent category
Source URL
/content/employees-it-and-environmental-checks-when-buying-business
Links
Confidential information and confidentiality agreements
Understand your legal obligations when buying an existing business.
Much of the information you'll want to know about a business you are hoping to buy will be confidential, while some will be publicly available.
Information such as employee and customer records, for example, will be protected under the General Data Protection Regulation (GDPR) and the Data Protection Act 2018, while other details will just be commercially sensitive. See UK General Data Protection Regulation (UK GDPR).
If a vendor is keen to sell then they should co-operate fully and give you all of the information you need to arrive at an offer. This may include looking at bank loan details, property rental contracts and intellectual property licences, for example.
Confidentiality agreement
It is likely you will be asked to sign a confidentiality agreement (see non-disclosure agreements). This protects the existing business owner and stops you from using any information you have learned about the way the business is run should negotiations breakdown.
You should seek professional advice by getting a solicitor or lawyer to read anything you are asked to sign or check carefully for any clauses that could have a negative impact on any other businesses you own or are considering starting. You may already be looking at developing a product similar to one offered by the business, for example, and the confidentiality agreement may prevent you doing this if the deal falls through. See choose a solicitor for your business.
Once a business has been purchased it is important to respect the Data Protection Act for any information transferred to you under the sale, such as employee records and client information. It is wise to seek expert legal advice or speak to the Information Commissioner's Office (ICO) to ensure you operate within the law. Follow the ICO's guidance on information and data protection for organisations.
HelpAlso on this siteContent category
Source URL
/content/confidential-information-and-confidentiality-agreements
Links
Seeking professional advice when buying a business
Information on potential sources that help when buying a business.
There are many different advisers that can help when buying a business but if you are buying a registered company you can do some checks yourself.
It is possible to obtain copies of a company's accounts, annual return and other key documents. Find and update company information service.
Seeking expert advice
Other professionals worth contacting for expert advice include:
- Business transfer agents, business brokers or corporate financiers can help you through the process of due diligence from start to finish for a fixed fee or percentage of the sale price.
- A solicitor or lawyer will be able to help by looking at any legal contracts, including property deeds, for example. Choose a solicitor for your business.
- An accountant will be able to help you by looking at the business' finances, such as profit and loss accounts. Choose an accountant for your business.
- You can get help with intellectual property protection issues. An intellectual property agent will be able to search for any intellectual property licences the business holds. The Intellectual Property Office can also carry out searches on existing patents.
- A chartered surveyor will be able to help you assess the value of the business' property.
Ensure advisers have relevant professional experience
It is essential that the advisers you choose are experienced in business transfers and valuations.
Word of mouth is the best way to find a good adviser. Always ask any potential adviser about the last five deals they have worked on in the relevant sector and ask for references from previous clients.
You should also check that your advisers hold any necessary qualifications or certification and are members of relevant associations or trade bodies.
Content category
Source URL
/content/seeking-professional-advice-when-buying-business
Links
Legal and financial checks when buying a business
In this guide:
- Conducting research when buying a business
- Potential problems when buying a business
- How to assess a company's assets
- Legal and financial checks when buying a business
- Employees, IT and environmental checks when buying a business
- Confidential information and confidentiality agreements
- Seeking professional advice when buying a business
Potential problems when buying a business
Be aware of potential issues that may affect your purchase of an existing business.
Before buying a business, you should look out for any potential issues that may affect your purchase.
The reason for selling the business
Find out from the business owner why the business is on sale. If they don’t want to disclose this information, this could be cause for concern.
If the owner’s reason to sell the business is related to financial problems, you may want to reconsider the offer. See make sure a business is worth buying: due diligence.
Financial situation
The financials of the business are one of the most important indicators that will help you determine if your investment is safe.
It is sensible to take advice from professionals with experience of valuing businesses and their assets, such as accountants and solicitors. See legal and financial checks when buying a business.
Credit scores and outstanding debts
Lenders won't be willing to finance a purchase that represents a high level of risk so if the business has financial problems, you probably won’t be able to get a loan.
You want to make sure the business you purchase is free of debts. Using a credit agency will provide you with access to databases with up-to-date financial information. You can find out the credit-worthiness of a business with Equifax or Experian.
Employee turnover
High employee turnover indicates underlying problems, such as poor employee management, a negative work environment, poor salaries, or difficulty attracting and retaining good employees.
Employee satisfaction is key, as they are going to be your support in the business following the transaction. See factors affecting staff turnover.
Business model structure
You should be aware of the overall structure of the business. The reasons behind the apparent success of the company may be tied to the owner rather than good management of the company.
Although the company may have enjoyed stability, it might not be prepared for future changes in the industry. You need to analyse whether the foundations of the company are solid, even when you take some factors out of the equation.
Condition of included assets
You need to know exactly what assets are going to be included in the business acquisition.
You should look carefully at the condition of the physical and intangible items of your purchase.
Company reputation
Look into the reputation of the company and the general opinion of customers towards it.
You can gain a better understanding of how people see the business by looking at Google reviews, social media posts, testimonials, and other sources.
Legal issues
A company that has past legal issues may not be the best option when buying a business. There may be some underlying issues that are not so easy to spot.
Consider the help of a solicitor to ensure the company you are about to buy complies with required licenses and regulations, collection of customer data according to UK General Data Protection Regulation, and has its contracts in place.
Trustworthiness of owner
If an owner is un-cooperative, or reluctant to disclose information about the business, this could mean they are withholding information that could affect you.
Another cause for concern is when the business owner puts pressure on you to close the deal. They should give you a proper amount of time to carefully conduct due diligence and examine every detail of the business you are about to purchase.
If you have encountered one or more of the issues above, it doesn’t necessarily mean that you shouldn’t go ahead with the purchase. However, you should analyse your options and obtain legal advice. See choose a solicitor for your business.
Also on this siteContent category
Source URL
/content/potential-problems-when-buying-business
Links
How to assess a company's assets
Decide which assets you want to buy from the business and check the seller's intentions as regards those assets.
Once you have found a business you are interested in, the first thing you should do is find out exactly what is for sale, or decide which parts of the business you are interested in buying.
You may agree to purchase the whole business or just its assets, ie its equipment, stock and order book. If you only wish to buy the assets, you will need to determine whether the seller will sell them with or without compensation due to loss of tax benefits, for example from a share sale.
What you need to check when buying a business
Whether you want to make an offer to buy the whole business or to purchase just its assets, there are several important things to check, including:
- Whether the business has full legal ownership of all key assets such as plant, equipment and property. Ask to see documentation that proves all equipment and stock you are purchasing has been fully paid for and is not purely leased by the business - for example, check computer software licenses.
- If it has warranties and guarantees for any major pieces of equipment included in the deal such as computers, photocopiers, vehicles, etc.
- Whether any intellectual property is protected and registered. The Intellectual Property Office or a patent lawyer can help you check.
- What supplier and key customer contracts involve. Make sure you understand what these legally require from the business.
You will then need to decide how much these assets are worth, although to value the business as a whole you will also need to look at documentation such as its profit and loss account.
The above list is not exhaustive. There may be other things you need to check depending on the business you are considering buying.
It is sensible to take advice from professionals with experience of valuing businesses and their assets, such as accountants, lawyers, chartered surveyors, business transfer agents, business brokers and corporate financiers.
How to access company information from Companies House
If the company is registered with Companies House, you can also obtain copies of the company accounts, the annual return and the other key documents filed by your target business using the GOV.UK Find and update company information service.
Also on this siteContent category
Source URL
/content/how-assess-companys-assets
Links
Legal and financial checks when buying a business
Learn about the financial and legal checks you should make when considering buying a business.
When considering buying a business, ask the vendors for any information you wish to see. They should be happy to provide this, although you may have to sign a confidentiality agreement. The seller will want to protect certain aspects of the business, so some information may be off limits until close to completion - despite your signing of a confidentiality agreement.
The legal and financial items to check and where to get help with these include:
Information about the business
- Check the vendor has the legal right to sell the business as there may be more than one decision-maker involved. If the business is a company registered at Companies House you will be able to get the necessary information from Companies House. Find and update company information service.
The original business plan
- Ask the vendor to see the original business plan. This will outline issues such as start-up finance which may notify you of any outstanding loans, for example.
Financial commitments
- Examine the business' accounts, including the detailed management profit and loss account and balance sheet. These and other documents may be available from Companies House if the business is legally formed as a company. Find and update company information service.
- Ask for documentation regarding outstanding loans and debts. Get your accountant to look at any financial details.
Ownership of assets
- Check the business has legal ownership of its key assets and determine what the terms and conditions are for these assets. Ask your solicitor to check the property deeds for premises owned by the business, for example, or ask for the rental agreement and speak to the landlord if you want to continue to operate the business from its current premises.
- You should also ask for information and documentation regarding the business' current employees, IT infrastructure and other technology as well as any issues relating to the environment.
Legal actions
- Check with the Northern Ireland Courts and Tribunals Service for court cases or late-payment actions being taken against or by the business that could affect its finances or reputation.
Seek professional advice
It is sensible to take advice from professionals with experience of valuing businesses and their assets, such as accountants, lawyers, chartered surveyors, business transfer agents, business brokers and corporate financiers. See seeking professional advice when buying a business.
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Employees, IT and environmental checks when buying a business
What you need to know about a business' employees, IT systems and environmental responsibilities before buying it.
Responsibility to existing employees
One of the key considerations when thinking about buying a business is its existing employees. Normally a new business owner has to continue to employ the existing staff on their current terms and conditions under rules known as the Transfer of Undertakings (Protection of Employment) Regulations (TUPE). Understand your responsibilities to employees if you buy or sell a business.
Your main concern when assessing a business in the first instance is how much the current terms and conditions are going to cost on an annual or monthly basis. To do this you should:
- Ask to see copies of employee contracts. However, you need to remember that these may differ for different levels of employee.
- Look at employee costs such as the monthly wage bill, National Insurance contributions, pension contributions and any other benefits. This may include company cars, health insurance, gym membership, travel loans etc.
Remember any documents you see are highly confidential. Many of the business' employees may not know the business is up for sale. Once you have bought a business you need to comply with TUPE and other employment laws.
IT and other technology
A business' IT system is often vital to its smooth running. You will therefore want to consider how old any systems and equipment are and whether it is being sold as part of the deal. You will need to ask questions such as:
- What is the value of the IT equipment and other technology?
- Are these assets under guarantee?
- What is included? Does it all belong to the business?
- Are there ongoing IT maintenance and service agreements/contracts essential to the business?
- What contingency plans does the business have in place for data loss? Does it have policies and procedures in place? Who has access to this data?
The environment
Another consideration will be the business' effect on the environment. Depending on the business sector it may have to pay environmental taxes and have other obligations in this area. If you think the business may be affected, contact the Northern Ireland Environment Agency (NIEA).
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Confidential information and confidentiality agreements
Understand your legal obligations when buying an existing business.
Much of the information you'll want to know about a business you are hoping to buy will be confidential, while some will be publicly available.
Information such as employee and customer records, for example, will be protected under the General Data Protection Regulation (GDPR) and the Data Protection Act 2018, while other details will just be commercially sensitive. See UK General Data Protection Regulation (UK GDPR).
If a vendor is keen to sell then they should co-operate fully and give you all of the information you need to arrive at an offer. This may include looking at bank loan details, property rental contracts and intellectual property licences, for example.
Confidentiality agreement
It is likely you will be asked to sign a confidentiality agreement (see non-disclosure agreements). This protects the existing business owner and stops you from using any information you have learned about the way the business is run should negotiations breakdown.
You should seek professional advice by getting a solicitor or lawyer to read anything you are asked to sign or check carefully for any clauses that could have a negative impact on any other businesses you own or are considering starting. You may already be looking at developing a product similar to one offered by the business, for example, and the confidentiality agreement may prevent you doing this if the deal falls through. See choose a solicitor for your business.
Once a business has been purchased it is important to respect the Data Protection Act for any information transferred to you under the sale, such as employee records and client information. It is wise to seek expert legal advice or speak to the Information Commissioner's Office (ICO) to ensure you operate within the law. Follow the ICO's guidance on information and data protection for organisations.
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Seeking professional advice when buying a business
Information on potential sources that help when buying a business.
There are many different advisers that can help when buying a business but if you are buying a registered company you can do some checks yourself.
It is possible to obtain copies of a company's accounts, annual return and other key documents. Find and update company information service.
Seeking expert advice
Other professionals worth contacting for expert advice include:
- Business transfer agents, business brokers or corporate financiers can help you through the process of due diligence from start to finish for a fixed fee or percentage of the sale price.
- A solicitor or lawyer will be able to help by looking at any legal contracts, including property deeds, for example. Choose a solicitor for your business.
- An accountant will be able to help you by looking at the business' finances, such as profit and loss accounts. Choose an accountant for your business.
- You can get help with intellectual property protection issues. An intellectual property agent will be able to search for any intellectual property licences the business holds. The Intellectual Property Office can also carry out searches on existing patents.
- A chartered surveyor will be able to help you assess the value of the business' property.
Ensure advisers have relevant professional experience
It is essential that the advisers you choose are experienced in business transfers and valuations.
Word of mouth is the best way to find a good adviser. Always ask any potential adviser about the last five deals they have worked on in the relevant sector and ask for references from previous clients.
You should also check that your advisers hold any necessary qualifications or certification and are members of relevant associations or trade bodies.
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Preparing for the final contract
In this guide:
- Understanding contracts when buying or selling a business
- Preparing to negotiate the sale of a business
- Preparing for the final contract
- Signing and completing the sale of a business
- Negotiating the sales deal - buyer's perspective
- Negotiating the sales deal - seller's perspective
- Checklist before you sign a sales contract
Preparing to negotiate the sale of a business
The contracts and non-legally binding documents you need for the sale process to begin.
Whether buying or selling a business, take time to plan it carefully. Take expert advice to assess the risks, set clear aims and a strategy for achieving them.
The first contracts you sign will be with a financial adviser for finance and tax advice and a solicitor for legal advice. Sellers are also likely to appoint a business transfer agent or business broker to approach possible buyers. You need to clearly define tasks and fee structures. For more information, see choose a solicitor for your business and choose an accountant for your business.
Confidentiality or non-disclosure agreement
The seller's solicitor will draw up a legally-binding confidentiality or non-disclosure agreement to be signed by all prospective buyers before they receive the sales memorandum. A business broker or corporate finance adviser will often also do this.
Sales memorandum
In the sales memorandum, which is not legally binding, the seller gives details of
- the business sector
- how long the business has been trading
- main financial details, eg profit, cashflow, asset value, total debt
- number, age, length of service, job descriptions and details of salaries and benefits of all staff
- location of premises, size, rent and rates, freehold or leasehold (with terms) special considerations (eg special licenses)
- the structure of the sale, eg is the sale of part or all of the business
Purchase offers
Ideally, all purchase offers should be made in writing. Any initial verbal purchase offer should be followed up with a letter setting out the main details and stating prominently that the offer is "subject to contract", in other words, not legally binding.
The offer should include details of:
- what the buyer is offering to purchase, eg the business or its assets
- the offer price and payment terms
- the main information required by the buyer before a firm offer will be made, eg whether leases, licences and client contracts are transferable, liabilities for employees, etc
At this stage, the seller compares offers and selects a buyer. It is the seller's responsibility to check the credit-worthiness of prospective buyers and that the buyer can raise the funds to buy the business. The buyer then needs to start checking the business - this is called preliminary due diligence. Due diligence should not be started until lawyers have been instructed and a firm purchase offer has been agreed and signed.
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Preparing for the final contract
Your legal obligations as you enter the final stage of negotiations.
When buyer and seller are satisfied with their initial checks, and an initial offer has been made and accepted, the next step is to negotiate the firm purchase offer, which is called a Heads of Terms Agreement, or Heads of Agreement. This document sets out the main points of the sale and is not usually legally binding - except for issues of exclusivity and confidentiality.
What should the purchase offer include?
The Heads of Agreement should cover:
- what is included in the sale
- the price and payment structure
- the terms of the period of exclusivity to complete the sale, including that period's termination (usually the buyer offers a small deposit in return for the seller taking the company off the market)
- preconditions for the sale (eg minimum level of profits or orders within a certain time)
Parts of the agreement are legally binding and set out in separate documents:
- exclusivity
- confidentiality
- warranties
- indemnities
Other legally-binding agreements include the seller's disclosure letter limiting his liabilities under the warranties, and any agreements from the seller and buyer to pay each other's costs in certain circumstances if the sale falls through.
All these documents need to be carefully prepared and thoroughly checked. If the seller does not meet the preconditions, the sale will probably not go ahead. If warranties are breached, the buyer can sue for damages. It is a criminal offence for the seller to give false or misleading information about shares.
Due diligence
Once the Heads of Agreement is signed, the buyer's advisers carry out thorough searches into the business records, called detailed due diligence. There are three types of due diligence:
- legal - for example, checking that the business has legal title to the assets which it is selling/transferring
- financial - checking that everything is in order financially
- commercial - assessing the business' position in the market place
See make sure a business is worth buying: due diligence.
During this period, negotiations continue with the seller on drafting the final sale agreement, or sale purchase contract.
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Signing and completing the sale of a business
Details of the sale purchase contract and documentation, and the main tasks you must do to complete the sale.
You should ensure all the agreements made during the negotiations are included in the sale purchase contract and that all the necessary details are set out in the accompanying documentation. Most of these documents are drawn up by the buyer's solicitor and negotiated, finalised and signed remotely.
What should the sale purchase contract include?
The final documentation typically includes:
- the sale agreement
- the tax deed (in share purchases, this is the seller's indemnity against unforeseen tax liability)
- any other indemnity agreements, where the seller agrees to reimburse the buyer in full for undisclosed liabilities incurred by the company before the sale
- minutes of the board meeting agreeing the transfer of ownership and resignation of directors
- transfer documents for licences, leases, client contracts, shares, etc
- service agreements (for the seller and other directors remaining in an advisory role and for employees remaining with the business)
- finance details for the sale (including guarantees, loan or share agreements)
- agreements for any deferred payments by the buyer
- warranties, for example guaranteeing the accuracy of the seller's statements on all key information
- the seller protection schedule for the buyer's claims against warranties
- the seller's disclosure letter and documentary evidence regarding warranties
- non-compete agreements or covenants (for the seller not to set up a competing business in the same area within a given time period)
After signing, the buyer's and seller's solicitors ensure that each side keeps the original documents they need. The buyer's solicitors prepare a file of all the documentation for both the seller and the buyer.
Completing the sale of the business
To complete the sale:
- the buyer's solicitors register the change of ownership and directors at Companies House
- in asset and goodwill deals, the seller deregisters and the buyer registers for VAT
- the financial agreements are put into effect
- the seller - and the buyer if necessary - must have informed and consulted affected employees and be compliant under the Transfer of Undertakings (Protection of Employment) (TUPE) regulations
- buyer and seller work through the task list for the handover
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Negotiating the sales deal - buyer's perspective
The main points you need to consider when you are negotiating to buy a business.
Throughout your research and negotiations, keep sight of your aims and the risk assessment you made for buying this business at the price you have offered. You might lose money on advisers' fees, but it is better to cancel the sale than take on liabilities you cannot afford. Have at least one other target business lined up in case this deal falls through.
Gain a thorough understanding of the business you are buying
Do your own valuation of the company, its market position, future profits, how it will fit with your existing business, if you have one, and weigh the total cost against total benefit before you make an initial offer. Find out why the seller wants to sell and if the business has any major problems. Decide whether you want to buy the assets only, and therefore have no legal obligations for previous contracts, or the entire business. If attempting to buy assets only, be aware that a seller may expect a higher price to compensate for any loss of tax benefits available from the sale of shares.
You need to find the balance between protecting yourself against future liability and maintaining trust with the seller, especially if you want the seller to continue in an advisory role during any handover period. Your inquiries need to be thorough but also discreet enough not to disrupt the business.
What to look out for when buying a business
Before you decide to buy, be sure that
- the seller has given you all the information you need
- the seller's claims are confirmed by the business' records and by your discussions with clients, suppliers, etc
- you know the exact ownership of the business and its assets
- the warranties and disclosure letter cover all unexpected contractual obligations
- you know the cost of your liabilities to the business' employees, especially concerning pensions and redundancy pay
- all problems have been resolved and agreed in writing with the seller
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Negotiating the sales deal - seller's perspective
The main points you need to consider when negotiating the sale of your business.
Throughout the negotiations, keep in mind what you want to achieve in selling your business. If necessary, reconsider what you are prepared to sell, the kind of buyer and financing. For example, you could try for an employee buyout rather than a trade sale. Even if you lose money on advisers' fees, it might be better than selling and not achieving your aims.
See how to achieve an employee buyout.
Using a third party agent for anonymity
If selling to another business, use a business transfer agent, business broker or corporate financier to issue your sales memorandum. This way you do not reveal your business' identity until you have made your choice of potential buyers.
Before selling your business
Before you start discussions, get your buyers to sign confidentiality or non-disclosure agreements. You need to check their credit-worthiness at this early stage to eliminate prospective buyers who cannot pay. Compare the prices and payment terms in their initial offers. Some may include too many future payments conditional on profits or other targets. Make your first choice, but keep other buyers lined up in case this deal falls through.
You may have decided to sell to the highest bidder or the one who best secures the business' future. Either way, you should be prepared to continue working for the business during a certain period if your knowledge and contacts are vital to the business.
Take great care over the wording and what is covered by the warranties and indemnities. Have your solicitor draft a disclosure letter to limit your liabilities and a vendor protection schedule to limit the time period within which they apply. See your responsibilities and liabilities when selling your business.
You need to take equal care over the financial details and make a more detailed check of your buyer's financial track record and the payment structure they are offering.
Before you agree to sell, make sure that all problems have been resolved and agreed in writing with the buyer.
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Checklist before you sign a sales contract
The details you need to check before and after you sign the final contract in order to complete the sale of a business.
Before you sign, you need to double-check the details written into the final contract and its accompanying documents. Once you have signed, there is a further list of tasks you need to do before you can complete the sale.
Checklist for selling or buying a business
Before you sign a contract, you should:
- review your aims and how well this contract meets them
- make sure all the agreements made during the negotiation are included in the contract
- make sure there are no vaguely worded provisions, exclusions or limitations in the contract which could give rise to problems later
- if you are buying, ensure you have non-compete agreements in place
- check the financial and tax details again with your financial adviser
- check your obligations and the wording of the contract and other agreements again with your solicitor
- ensure all the necessary documentation and signatories are present at the signing session
- establish a schedule of tasks for completing the sale, making the handover, continuing the business and meeting future obligations
- make sure you have copies of all negotiated agreements kept in a safe place
- have informed and consulted affected employees in compliance with the Transfer of Undertakings (Protection of Employment) (TUPE) regulations
After you have signed a contract, make sure that:
- all others who need to sign have signed the relevant documents
- your solicitor has all the original documents you need to keep
- the buyer's solicitor has copies of all the documents and will present a digital version to both the buyer and seller
- the financial agreements are put into effect
- the buyer's solicitor makes the change of ownership return to Companies House
- in asset and goodwill deals, the seller deregisters and the buyer registers for VAT
- the seller - and the buyer if applicable - continues to inform and consult affected employees in compliance with TUPE as necessary
- both sides are ready for the handover and for informing clients, suppliers, etc
- the business operates smoothly up to and after the sale is completed
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Negotiating the sales deal - seller's perspective
In this guide:
- Understanding contracts when buying or selling a business
- Preparing to negotiate the sale of a business
- Preparing for the final contract
- Signing and completing the sale of a business
- Negotiating the sales deal - buyer's perspective
- Negotiating the sales deal - seller's perspective
- Checklist before you sign a sales contract
Preparing to negotiate the sale of a business
The contracts and non-legally binding documents you need for the sale process to begin.
Whether buying or selling a business, take time to plan it carefully. Take expert advice to assess the risks, set clear aims and a strategy for achieving them.
The first contracts you sign will be with a financial adviser for finance and tax advice and a solicitor for legal advice. Sellers are also likely to appoint a business transfer agent or business broker to approach possible buyers. You need to clearly define tasks and fee structures. For more information, see choose a solicitor for your business and choose an accountant for your business.
Confidentiality or non-disclosure agreement
The seller's solicitor will draw up a legally-binding confidentiality or non-disclosure agreement to be signed by all prospective buyers before they receive the sales memorandum. A business broker or corporate finance adviser will often also do this.
Sales memorandum
In the sales memorandum, which is not legally binding, the seller gives details of
- the business sector
- how long the business has been trading
- main financial details, eg profit, cashflow, asset value, total debt
- number, age, length of service, job descriptions and details of salaries and benefits of all staff
- location of premises, size, rent and rates, freehold or leasehold (with terms) special considerations (eg special licenses)
- the structure of the sale, eg is the sale of part or all of the business
Purchase offers
Ideally, all purchase offers should be made in writing. Any initial verbal purchase offer should be followed up with a letter setting out the main details and stating prominently that the offer is "subject to contract", in other words, not legally binding.
The offer should include details of:
- what the buyer is offering to purchase, eg the business or its assets
- the offer price and payment terms
- the main information required by the buyer before a firm offer will be made, eg whether leases, licences and client contracts are transferable, liabilities for employees, etc
At this stage, the seller compares offers and selects a buyer. It is the seller's responsibility to check the credit-worthiness of prospective buyers and that the buyer can raise the funds to buy the business. The buyer then needs to start checking the business - this is called preliminary due diligence. Due diligence should not be started until lawyers have been instructed and a firm purchase offer has been agreed and signed.
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Preparing for the final contract
Your legal obligations as you enter the final stage of negotiations.
When buyer and seller are satisfied with their initial checks, and an initial offer has been made and accepted, the next step is to negotiate the firm purchase offer, which is called a Heads of Terms Agreement, or Heads of Agreement. This document sets out the main points of the sale and is not usually legally binding - except for issues of exclusivity and confidentiality.
What should the purchase offer include?
The Heads of Agreement should cover:
- what is included in the sale
- the price and payment structure
- the terms of the period of exclusivity to complete the sale, including that period's termination (usually the buyer offers a small deposit in return for the seller taking the company off the market)
- preconditions for the sale (eg minimum level of profits or orders within a certain time)
Parts of the agreement are legally binding and set out in separate documents:
- exclusivity
- confidentiality
- warranties
- indemnities
Other legally-binding agreements include the seller's disclosure letter limiting his liabilities under the warranties, and any agreements from the seller and buyer to pay each other's costs in certain circumstances if the sale falls through.
All these documents need to be carefully prepared and thoroughly checked. If the seller does not meet the preconditions, the sale will probably not go ahead. If warranties are breached, the buyer can sue for damages. It is a criminal offence for the seller to give false or misleading information about shares.
Due diligence
Once the Heads of Agreement is signed, the buyer's advisers carry out thorough searches into the business records, called detailed due diligence. There are three types of due diligence:
- legal - for example, checking that the business has legal title to the assets which it is selling/transferring
- financial - checking that everything is in order financially
- commercial - assessing the business' position in the market place
See make sure a business is worth buying: due diligence.
During this period, negotiations continue with the seller on drafting the final sale agreement, or sale purchase contract.
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Signing and completing the sale of a business
Details of the sale purchase contract and documentation, and the main tasks you must do to complete the sale.
You should ensure all the agreements made during the negotiations are included in the sale purchase contract and that all the necessary details are set out in the accompanying documentation. Most of these documents are drawn up by the buyer's solicitor and negotiated, finalised and signed remotely.
What should the sale purchase contract include?
The final documentation typically includes:
- the sale agreement
- the tax deed (in share purchases, this is the seller's indemnity against unforeseen tax liability)
- any other indemnity agreements, where the seller agrees to reimburse the buyer in full for undisclosed liabilities incurred by the company before the sale
- minutes of the board meeting agreeing the transfer of ownership and resignation of directors
- transfer documents for licences, leases, client contracts, shares, etc
- service agreements (for the seller and other directors remaining in an advisory role and for employees remaining with the business)
- finance details for the sale (including guarantees, loan or share agreements)
- agreements for any deferred payments by the buyer
- warranties, for example guaranteeing the accuracy of the seller's statements on all key information
- the seller protection schedule for the buyer's claims against warranties
- the seller's disclosure letter and documentary evidence regarding warranties
- non-compete agreements or covenants (for the seller not to set up a competing business in the same area within a given time period)
After signing, the buyer's and seller's solicitors ensure that each side keeps the original documents they need. The buyer's solicitors prepare a file of all the documentation for both the seller and the buyer.
Completing the sale of the business
To complete the sale:
- the buyer's solicitors register the change of ownership and directors at Companies House
- in asset and goodwill deals, the seller deregisters and the buyer registers for VAT
- the financial agreements are put into effect
- the seller - and the buyer if necessary - must have informed and consulted affected employees and be compliant under the Transfer of Undertakings (Protection of Employment) (TUPE) regulations
- buyer and seller work through the task list for the handover
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Negotiating the sales deal - buyer's perspective
The main points you need to consider when you are negotiating to buy a business.
Throughout your research and negotiations, keep sight of your aims and the risk assessment you made for buying this business at the price you have offered. You might lose money on advisers' fees, but it is better to cancel the sale than take on liabilities you cannot afford. Have at least one other target business lined up in case this deal falls through.
Gain a thorough understanding of the business you are buying
Do your own valuation of the company, its market position, future profits, how it will fit with your existing business, if you have one, and weigh the total cost against total benefit before you make an initial offer. Find out why the seller wants to sell and if the business has any major problems. Decide whether you want to buy the assets only, and therefore have no legal obligations for previous contracts, or the entire business. If attempting to buy assets only, be aware that a seller may expect a higher price to compensate for any loss of tax benefits available from the sale of shares.
You need to find the balance between protecting yourself against future liability and maintaining trust with the seller, especially if you want the seller to continue in an advisory role during any handover period. Your inquiries need to be thorough but also discreet enough not to disrupt the business.
What to look out for when buying a business
Before you decide to buy, be sure that
- the seller has given you all the information you need
- the seller's claims are confirmed by the business' records and by your discussions with clients, suppliers, etc
- you know the exact ownership of the business and its assets
- the warranties and disclosure letter cover all unexpected contractual obligations
- you know the cost of your liabilities to the business' employees, especially concerning pensions and redundancy pay
- all problems have been resolved and agreed in writing with the seller
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Negotiating the sales deal - seller's perspective
The main points you need to consider when negotiating the sale of your business.
Throughout the negotiations, keep in mind what you want to achieve in selling your business. If necessary, reconsider what you are prepared to sell, the kind of buyer and financing. For example, you could try for an employee buyout rather than a trade sale. Even if you lose money on advisers' fees, it might be better than selling and not achieving your aims.
See how to achieve an employee buyout.
Using a third party agent for anonymity
If selling to another business, use a business transfer agent, business broker or corporate financier to issue your sales memorandum. This way you do not reveal your business' identity until you have made your choice of potential buyers.
Before selling your business
Before you start discussions, get your buyers to sign confidentiality or non-disclosure agreements. You need to check their credit-worthiness at this early stage to eliminate prospective buyers who cannot pay. Compare the prices and payment terms in their initial offers. Some may include too many future payments conditional on profits or other targets. Make your first choice, but keep other buyers lined up in case this deal falls through.
You may have decided to sell to the highest bidder or the one who best secures the business' future. Either way, you should be prepared to continue working for the business during a certain period if your knowledge and contacts are vital to the business.
Take great care over the wording and what is covered by the warranties and indemnities. Have your solicitor draft a disclosure letter to limit your liabilities and a vendor protection schedule to limit the time period within which they apply. See your responsibilities and liabilities when selling your business.
You need to take equal care over the financial details and make a more detailed check of your buyer's financial track record and the payment structure they are offering.
Before you agree to sell, make sure that all problems have been resolved and agreed in writing with the buyer.
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Checklist before you sign a sales contract
The details you need to check before and after you sign the final contract in order to complete the sale of a business.
Before you sign, you need to double-check the details written into the final contract and its accompanying documents. Once you have signed, there is a further list of tasks you need to do before you can complete the sale.
Checklist for selling or buying a business
Before you sign a contract, you should:
- review your aims and how well this contract meets them
- make sure all the agreements made during the negotiation are included in the contract
- make sure there are no vaguely worded provisions, exclusions or limitations in the contract which could give rise to problems later
- if you are buying, ensure you have non-compete agreements in place
- check the financial and tax details again with your financial adviser
- check your obligations and the wording of the contract and other agreements again with your solicitor
- ensure all the necessary documentation and signatories are present at the signing session
- establish a schedule of tasks for completing the sale, making the handover, continuing the business and meeting future obligations
- make sure you have copies of all negotiated agreements kept in a safe place
- have informed and consulted affected employees in compliance with the Transfer of Undertakings (Protection of Employment) (TUPE) regulations
After you have signed a contract, make sure that:
- all others who need to sign have signed the relevant documents
- your solicitor has all the original documents you need to keep
- the buyer's solicitor has copies of all the documents and will present a digital version to both the buyer and seller
- the financial agreements are put into effect
- the buyer's solicitor makes the change of ownership return to Companies House
- in asset and goodwill deals, the seller deregisters and the buyer registers for VAT
- the seller - and the buyer if applicable - continues to inform and consult affected employees in compliance with TUPE as necessary
- both sides are ready for the handover and for informing clients, suppliers, etc
- the business operates smoothly up to and after the sale is completed
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Franchise fees and royalties
In this guide:
- Franchise your business
- Franchising options
- Advantages and disadvantages of franchising your business
- Is franchising right for your business?
- Develop your franchise format
- The franchise agreement for a franchisor
- Franchise fees and royalties
- Marketing your franchise opportunity
- Managing your franchisees
- Turn your business into a franchise - eight top tips
- Turning my business into a franchise - the Zip Yard (video)
Franchising options
Business format franchising, licensing, and agency and distribution agreements.
If you have a successful business and are looking to expand, you might want to open additional outlets. Franchising your business can be a very effective way of doing this. Instead of financing and managing the new outlets yourself, you work with independent franchisees.
Business format franchising
With business format franchising, you put together a complete business package. You then licence this format to franchisees. They run their own businesses, but use your brand and proven business model:
- you provide an operations manual, detailing how to set up and manage a new outlet - see develop your franchise format
- you agree a contract with your franchisee setting out what rights and obligations you each have through the franchise agreement - see the franchise agreement for a franchisor
- the franchisee pays you franchise fees and royalties for the right to use your business concept
- you train and support the franchisee through their start-up period - support could include ongoing marketing, business growth help, regular regional meetings or how to negotiate purchasing contracts
Other franchising arrangements
This guide focuses specifically on business format franchising. However there are other business arrangements which are sometimes also referred to as franchising, including:
- selling a licence allowing someone else to manufacture and sell your product, but without telling them how to run their business
- using an agent, who sells your product on your behalf
- setting up a distribution agreement, whereby you sell your products to another business that then sells them to their own customers
For more information on using agents and distributors, see sales channels to reach your customers.
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Advantages and disadvantages of franchising your business
The benefits and potential drawbacks of using franchising to grow your business.
Franchising is an excellent way of expanding a business that is already successful. However, you should be aware that franchising is not suitable for every business.
Understanding the advantages and disadvantages of franchising will enable you to decide if franchising is a suitable option for your business expansion.
Advantages of franchising your business
Grow your business
Franchising your business can be a cost-effective way to grow your business. You will not have to cover the cost of investing in new premises or staff. Additional sales lead to additional profit and if you retain this in the business, in the long-term, you should have a saleable asset for your future.
Costs
Each franchisee finances their own franchise outlet. While the franchisee meets all the costs and collects the income, you receive franchise fees and royalties or a mark-up on products sold by the franchisee.
Easier management
he franchisees also run their businesses therefore reducing the management demands placed on you. The best franchisees will be highly motivated and have local expertise, making your life much easier.
Develop your brand
The more franchisees you have the better known your brand becomes. Your brand benefits from the capital investment of the franchisee.
Motivated franchisees
Franchisees are likely to be more motivated than a manager as they have a vested interest in the success of their business and therefore the success of your brand.
Purchasing power
A larger business is more secure and additional turnover and profit can provide access to better deals for office equipment, vehicles and other business purchases.
Ideas for future success
Franchisees can contribute fresh ideas for the future success of the brand maybe outlining opportunities that you might not have identified otherwise.
Support from others
Being a business owner can be isolating so having a franchise network can offer support and advice.
Disadvantages of franchising your business
Not a fix for a failing business
Franchising is not a solution to provide injections of capital from other people when a business is in difficulty. You should only go down the franchise route if you already have a successful business up and running.
Costs
Franchising your business will involve significant financial investment at the outset to get a successful franchise model in place for future growth of the business including investment in preparing legal documents, operations manuals, marketing materials and recruitment.
Time
Franchising will take a lot of time investment especially when initially setting up the franchise model. You will also have to take the time to ensure you attract the right franchisees and control what they do.
Training and support
You will have to develop and deliver a suite of training and support for your franchisees to successfully sell your brand. Businesses need to have systems and procedures in place that can be copied by most people to run a successful business.
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Is franchising right for your business?
Offering franchisees a successful business model, and having the right resources and skills.
Many businesses have used franchising successfully, including well-known names like McDonalds, Clarks Shoes, Domino's Pizza, Reeds Rains estate agencies, Thorntons, Subway, Toni & Guy, Costa coffee and the Zip Yard. However, franchising doesn't suit every business.
Successful business
To start with, your business needs to be successful. Nobody will want to buy the right to franchise a business that doesn't make money. A franchised business needs to be profitable enough to make money for both the franchisee and you.
Replicated in different locations
Your business needs to be one that can be replicated in different locations by your franchisees. Businesses that need high skills levels or professional qualifications can be more difficult to franchise but a number of major optician chains have succeeded in doing so.
An attractive franchise
At the same time, you need to offer your franchisees something that makes it worth their while paying you, instead of simply setting up their business independently. For example, you might have a recognised brand name, provide equipment or supplies they need, or help with training and marketing support.
Having a well-organised and well-run franchise helps you recruit franchisees and is a strong incentive for franchisees to remain part of the franchise at the end of the initial franchise period.
It's worthwhile gaining an understanding of what franchisees look for when assessing opportunities to buy a franchise.
Your resources
You also need to think about the demands franchising places on you. You need to invest in developing and marketing the format. If you have limited financial resources, or are already working flat out running your business, you may not be able to do this.
Skills and motivation
Finally, you need to have the right skills and attitude to make franchising a success. You need to be able to sell your concept to potential franchisees, and to work with and control them. Rather than dealing directly with customers yourself, you profit by helping your franchisees to be successful.
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Develop your franchise format
The franchise operations manual, and protecting your brand.
To franchise your business, you need to convince potential franchisees that they will make money. Franchisees will want to see evidence that the business model is sound, that you deliver what you have committed to in the franchise agreement and that they can make a good living running a franchise. You do this by having a successful business, and an operations manual that shows how franchisees can replicate it.
Demonstrate demand for your product or service
Market testing is an important part of this. If you cannot prove that there is a demand for the product or service your franchisees will be offering, they will be doomed to failure.
If you can demonstrate a clear demand for your product and service, you then need to prove that the franchise model works through the establishment of a pilot franchise operation. The pilot franchise operation will establish that all the back-up systems including training, operating manuals, financial support and marketing campaigns are effective. It will also give franchisees an indication of likely set-up costs, break-even points and how long it will take to become profitable.
Franchise operations manual
The franchise operations or operating manual gives detailed information on how to set up and manage a new outlet. It highlights key information such as:
- company information, key personnel and history
- identifying the franchisee's responsibilities
- how a franchisee sets up a franchise including staff recruitment and office equipment
- main operating requirements
- main management requirements
- how franchisees ensure quality and consistency within their franchise
- customer service standards
- performance reporting and benchmarks
- training and support
- pricing, sales and marketing
The work involved in writing your franchise operations manual is quite extensive. Read British Franchise Association guidance on franchising.
Protecting your brand
Your brand is likely to be an important part of what you offer franchisees. Even if they know how to run a successful outlet, they stay with you because your brand helps them attract customers. Protecting your brand is essential. Read more on branding for your business.
It is important that you put in place relevant protections to prevent your intellectual property (IP) being infringed (for example by registering your trade marks and company name or obtaining patents for your products). Once you have adequate protections in place you can then benefit from licensing your intellectual property. It is also easier to protect your IP if it is registered and you can prove ownership.
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The franchise agreement for a franchisor
A clear contract sets out what rights and obligations you and the franchisee have.
When you franchise your business, you - the franchisor - enter into a legal agreement with the franchisee. A clear, written contract known as the franchise agreement is essential.
The franchise agreement sets out what rights and obligations you each have. Key issues include:
- what geographical location the franchisee can operate in and whether they have exclusive rights in that location
- what rights the franchisee has to use your intellectual property - eg your trade marks
- what restrictions there are on what the franchisee can do
- what fees the franchisee will pay
- how you will support and train the franchisee initially
- what continuing support you will provide - eg national marketing campaigns or administrative support
- how long the franchise lasts and what happens at the end of the term
- what happens if either of you wants to end the agreement to an end or if you wnat to sell your business
Agreements tend to be in favour of the franchisor. However, if the agreement is too one-sided in the franchisor's favour, it will be difficult to attract potential franchisees.
Seek legal advice
Franchise agreements involve complex legal issues. You should take advice from a solicitor with franchising expertise. Search for a legal advisor. You can also search for a solicitor.
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Franchise fees and royalties
Initial franchise fees help recover development and marketing costs while continuing royalties or mark-ups provide your profit.
When you franchise your business, you make money from fees the franchisee pays you.
Initial franchise fees
You charge an initial fee for the purchase of the franchise. This fee contributes towards the costs you have in developing and marketing the franchise concept.
Most companies charge an initial fee, which can vary in cost. The fee is based on the cost of setting the franchisee up in business. This initial fee enables the franchisee to invest a larger percentage of their capital in setting up and developing the business.
Continuing franchise fees
Your profits come from the continuing fees that franchisees pay you. Typically, they pay a management service fee based on turnover. If you are supplying them with products or other supplies, you can also profit from the mark-up on the prices at which you sell to them. Both these methods give you a common interest: the more the franchisee sells, the more profits you both make.
Setting the right level of continuing fees requires careful judgement. If the fees are too high, the franchise will not be attractive to new franchisees and existing franchisees might struggle to keep going. Fees should be based on the services provided by the franchisor and the costs incurred in providing them.
You need to work out:
- How much is the loyalty fee?
- How often is it to be paid?
- Is it a percentage or fixed amount?
- If it is a percentage, what is this based on?
- How does it compare to other franchise systems?
Advertising and marketing fees
Advertising and marketing fees are also usually charged as a fixed percentage of the sales achieved by franchisees. These can range from 1 per cent to as much as 5 per cent of gross sales. These fees are used to fund the regional and national marketing, advertising and brand awareness initiatives that you carry out on behalf of your franchisees.
Your bank may have specialist franchising advisers who can work with you on your franchising business plan and the fees you plan to charge. You may also want to take franchise finance advice from your accountant or a specialist consultant. See choose an accountant for your business.
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Marketing your franchise opportunity
Deciding who you want to franchise with and how to advertise and promote your business to attract potential franchisees.
You need to be realistic about how quickly you can grow your franchise. Although new franchisees usually provide the capital for their operations, you will be involved helping them set up. For example, you will have to run initial training, or provide hands-on support when they first start trading.
This means that you may only be able to cope with one or two new franchisees at a time. You may also prefer new franchisees to be relatively nearby, making it easier to visit them. Many new franchising companies aim for a gradual roll out across the country in this way.
What to include in your franchise offering
Once you have decided what to offer franchises, you need to prepare a franchise prospectus or brochure and update your website. This tells potential franchisees what you are offering and what they can expect. It should include:
-
an explanation of your product or service
-
what franchise territories you are offering
-
what the franchise fees are
-
what financial returns the franchisee might expect
-
information about your experience, franchise package, training, timescales, next steps and application form
Bear in mind that you are generally competing with other businesses to attract potential franchisees. At the same time, think carefully about what kinds of people you want to apply. They should have the finances needed to invest in the business, and the right management skills and attitude.
How to advertise and promote your franchise
To attract franchisees, you may want to:
- advertise in the business opportunities section of a newspaper or on a franchise website such as whichfranchise.com
- utilise social media channels to highlight your offering and engage with potential franchisees - read more on social media best practice for business
- become a member of the British Franchise Association
- recruit potential franchisees at franchising exhibitions
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Managing your franchisees
Supporting and motivating your franchisees to grow sales and increase franchising fees.
Franchising your business isn't about selling franchises and then forgetting about them. You have a continuing relationship with your franchisees.
Providing support to your franchisees
You must provide the support detailed in the franchise agreement. This can include:
- helping them with initial set up of their franchise
- providing training in how to run the business
- running national promotional campaigns to increase sales
- helping them manage their business effectively
- innovating to keep your product or service ahead of the competition
- monitoring their performance and processes against the standards contained in the operations manual
Doing all this isn't just a matter of fulfilling your contractual obligations. By supporting franchisees, especially ensuring they have a solid foundation of support and training to prepare them for running the franchise, you help them succeed - and increase the fees you receive.
Motivating franchisees
Although it isn't included in the agreement, you also have a role to play in motivating franchisees. New franchisees can find the early months difficult and may become discouraged. Successful franchisees may reach their own comfort level and stop trying so hard to increase sales. Again, by motivating them you help yourself.
Encourage consistency from your franchisees
At the same time, you need to ensure that they are running their businesses the way they should. One of the keys to building a successful brand is consistency. If different franchisees run their businesses differently, your brand can suffer. Your operations manual should give clear information on the correct procedures.
Last but not least, you need efficient administration to ensure that you collect the right franchise fees.
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Turn your business into a franchise - eight top tips
Our top tips outline how you can successfully franchise your business.
Franchising can be a very effective way of growing your business.
Our top tips outline how you can successfully franchise your business:
1. Explore the options
There are a number of franchising options. The most popular route is business format franchising. This is when you put together a complete business package for a franchisee. Read more about franchising options.
2. Consider the advantages and disadvantages
Gain an understanding of the advantages and disadvantages of franchising. This will help you to decide if franchising is a suitable option to help you expand your business - see advantages and disadvantages of franchising your business.
3. Market test your franchise format
To franchise your business, you need to convince potential franchisees that they will make money. A good way of proving that your franchise business model is sound is by market testing to show demand for your product or service. It is also advisable to test a pilot franchise operation to find out if your franchise model works. This will also give a franchisees a good indication of likely set-up costs, break-even points and how long it will take to become profitable.
4. Develop a franchise operations manual
A franchise operations manual should give detailed information on how to set up and manage a new outlet. It will highlight key information to help the franchisee establish their franchise outlet. The manual will help to ensure that quality and consistency is maintained. See develop your franchise format.
5. Produce a franchise agreement
A formal legal contract is one of the most important aspects when franchising your business. It will clearly set out the rights and obligations for both the franchisor and the franchisee. You should seek legal advice when drawing up your franchise agreement. See the franchise agreement for a franchisor.
6. Set your fees
When you franchise your business you will make money from the fees the franchisee pays you. You will normally charge an initial fee for the purchase of the franchise and then charge continuing fees. It is important that you set the right level of continuing fees. If the fees are too high the franchise will not be attractive to new franchisees and existing franchisees might struggle to keep operating. Find out about franchise fees and royalties.
7. Market your franchise
You should prepare a franchise prospectus or brochure to inform potential franchisees what you are offering and what they can expect. You should include details of your products or services, franchise territories, fees and financial returns. Read more on marketing your franchise opportunity.
8. Manage your franchisees
Franchising your business isn't about selling franchises and then forgetting about them. You must maintain a continuing relationship with your franchisees. You should provide ongoing support to your franchisees and help motivate them to sell your products and services. See managing your franchisees.
For further information see our guidance on franchise your business and our video case study turning my business into a franchise - the Zip Yard (video).
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Franchise your business
Turning my business into a franchise - the Zip Yard (video)
Brian Kielt, director and co-founder of the Zip Yard, explains in this video how he turned his business into a franchise.
Brian Kielt, director and co-founder of the Zip Yard, explains how he turned his business into a franchise.
The Zip Yard is a clothing alterations franchise. The first shop opened in Belfast in 2005, and the first franchise store opened the following year. Zip Yard stores can now be found throughout the UK and Republic of Ireland. The Zip Yard franchise has plans to enter new markets including Europe, the United States and Australia.
Here Brian explains how he started the Zip Yard, and the support offered to new franchisees. He shares his experience of running a franchise - including the importance of offering training, signing a franchise agreement and having a strong business brand.
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Marketing your franchise opportunity
In this guide:
- Franchise your business
- Franchising options
- Advantages and disadvantages of franchising your business
- Is franchising right for your business?
- Develop your franchise format
- The franchise agreement for a franchisor
- Franchise fees and royalties
- Marketing your franchise opportunity
- Managing your franchisees
- Turn your business into a franchise - eight top tips
- Turning my business into a franchise - the Zip Yard (video)
Franchising options
Business format franchising, licensing, and agency and distribution agreements.
If you have a successful business and are looking to expand, you might want to open additional outlets. Franchising your business can be a very effective way of doing this. Instead of financing and managing the new outlets yourself, you work with independent franchisees.
Business format franchising
With business format franchising, you put together a complete business package. You then licence this format to franchisees. They run their own businesses, but use your brand and proven business model:
- you provide an operations manual, detailing how to set up and manage a new outlet - see develop your franchise format
- you agree a contract with your franchisee setting out what rights and obligations you each have through the franchise agreement - see the franchise agreement for a franchisor
- the franchisee pays you franchise fees and royalties for the right to use your business concept
- you train and support the franchisee through their start-up period - support could include ongoing marketing, business growth help, regular regional meetings or how to negotiate purchasing contracts
Other franchising arrangements
This guide focuses specifically on business format franchising. However there are other business arrangements which are sometimes also referred to as franchising, including:
- selling a licence allowing someone else to manufacture and sell your product, but without telling them how to run their business
- using an agent, who sells your product on your behalf
- setting up a distribution agreement, whereby you sell your products to another business that then sells them to their own customers
For more information on using agents and distributors, see sales channels to reach your customers.
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Advantages and disadvantages of franchising your business
The benefits and potential drawbacks of using franchising to grow your business.
Franchising is an excellent way of expanding a business that is already successful. However, you should be aware that franchising is not suitable for every business.
Understanding the advantages and disadvantages of franchising will enable you to decide if franchising is a suitable option for your business expansion.
Advantages of franchising your business
Grow your business
Franchising your business can be a cost-effective way to grow your business. You will not have to cover the cost of investing in new premises or staff. Additional sales lead to additional profit and if you retain this in the business, in the long-term, you should have a saleable asset for your future.
Costs
Each franchisee finances their own franchise outlet. While the franchisee meets all the costs and collects the income, you receive franchise fees and royalties or a mark-up on products sold by the franchisee.
Easier management
he franchisees also run their businesses therefore reducing the management demands placed on you. The best franchisees will be highly motivated and have local expertise, making your life much easier.
Develop your brand
The more franchisees you have the better known your brand becomes. Your brand benefits from the capital investment of the franchisee.
Motivated franchisees
Franchisees are likely to be more motivated than a manager as they have a vested interest in the success of their business and therefore the success of your brand.
Purchasing power
A larger business is more secure and additional turnover and profit can provide access to better deals for office equipment, vehicles and other business purchases.
Ideas for future success
Franchisees can contribute fresh ideas for the future success of the brand maybe outlining opportunities that you might not have identified otherwise.
Support from others
Being a business owner can be isolating so having a franchise network can offer support and advice.
Disadvantages of franchising your business
Not a fix for a failing business
Franchising is not a solution to provide injections of capital from other people when a business is in difficulty. You should only go down the franchise route if you already have a successful business up and running.
Costs
Franchising your business will involve significant financial investment at the outset to get a successful franchise model in place for future growth of the business including investment in preparing legal documents, operations manuals, marketing materials and recruitment.
Time
Franchising will take a lot of time investment especially when initially setting up the franchise model. You will also have to take the time to ensure you attract the right franchisees and control what they do.
Training and support
You will have to develop and deliver a suite of training and support for your franchisees to successfully sell your brand. Businesses need to have systems and procedures in place that can be copied by most people to run a successful business.
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Is franchising right for your business?
Offering franchisees a successful business model, and having the right resources and skills.
Many businesses have used franchising successfully, including well-known names like McDonalds, Clarks Shoes, Domino's Pizza, Reeds Rains estate agencies, Thorntons, Subway, Toni & Guy, Costa coffee and the Zip Yard. However, franchising doesn't suit every business.
Successful business
To start with, your business needs to be successful. Nobody will want to buy the right to franchise a business that doesn't make money. A franchised business needs to be profitable enough to make money for both the franchisee and you.
Replicated in different locations
Your business needs to be one that can be replicated in different locations by your franchisees. Businesses that need high skills levels or professional qualifications can be more difficult to franchise but a number of major optician chains have succeeded in doing so.
An attractive franchise
At the same time, you need to offer your franchisees something that makes it worth their while paying you, instead of simply setting up their business independently. For example, you might have a recognised brand name, provide equipment or supplies they need, or help with training and marketing support.
Having a well-organised and well-run franchise helps you recruit franchisees and is a strong incentive for franchisees to remain part of the franchise at the end of the initial franchise period.
It's worthwhile gaining an understanding of what franchisees look for when assessing opportunities to buy a franchise.
Your resources
You also need to think about the demands franchising places on you. You need to invest in developing and marketing the format. If you have limited financial resources, or are already working flat out running your business, you may not be able to do this.
Skills and motivation
Finally, you need to have the right skills and attitude to make franchising a success. You need to be able to sell your concept to potential franchisees, and to work with and control them. Rather than dealing directly with customers yourself, you profit by helping your franchisees to be successful.
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Develop your franchise format
The franchise operations manual, and protecting your brand.
To franchise your business, you need to convince potential franchisees that they will make money. Franchisees will want to see evidence that the business model is sound, that you deliver what you have committed to in the franchise agreement and that they can make a good living running a franchise. You do this by having a successful business, and an operations manual that shows how franchisees can replicate it.
Demonstrate demand for your product or service
Market testing is an important part of this. If you cannot prove that there is a demand for the product or service your franchisees will be offering, they will be doomed to failure.
If you can demonstrate a clear demand for your product and service, you then need to prove that the franchise model works through the establishment of a pilot franchise operation. The pilot franchise operation will establish that all the back-up systems including training, operating manuals, financial support and marketing campaigns are effective. It will also give franchisees an indication of likely set-up costs, break-even points and how long it will take to become profitable.
Franchise operations manual
The franchise operations or operating manual gives detailed information on how to set up and manage a new outlet. It highlights key information such as:
- company information, key personnel and history
- identifying the franchisee's responsibilities
- how a franchisee sets up a franchise including staff recruitment and office equipment
- main operating requirements
- main management requirements
- how franchisees ensure quality and consistency within their franchise
- customer service standards
- performance reporting and benchmarks
- training and support
- pricing, sales and marketing
The work involved in writing your franchise operations manual is quite extensive. Read British Franchise Association guidance on franchising.
Protecting your brand
Your brand is likely to be an important part of what you offer franchisees. Even if they know how to run a successful outlet, they stay with you because your brand helps them attract customers. Protecting your brand is essential. Read more on branding for your business.
It is important that you put in place relevant protections to prevent your intellectual property (IP) being infringed (for example by registering your trade marks and company name or obtaining patents for your products). Once you have adequate protections in place you can then benefit from licensing your intellectual property. It is also easier to protect your IP if it is registered and you can prove ownership.
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The franchise agreement for a franchisor
A clear contract sets out what rights and obligations you and the franchisee have.
When you franchise your business, you - the franchisor - enter into a legal agreement with the franchisee. A clear, written contract known as the franchise agreement is essential.
The franchise agreement sets out what rights and obligations you each have. Key issues include:
- what geographical location the franchisee can operate in and whether they have exclusive rights in that location
- what rights the franchisee has to use your intellectual property - eg your trade marks
- what restrictions there are on what the franchisee can do
- what fees the franchisee will pay
- how you will support and train the franchisee initially
- what continuing support you will provide - eg national marketing campaigns or administrative support
- how long the franchise lasts and what happens at the end of the term
- what happens if either of you wants to end the agreement to an end or if you wnat to sell your business
Agreements tend to be in favour of the franchisor. However, if the agreement is too one-sided in the franchisor's favour, it will be difficult to attract potential franchisees.
Seek legal advice
Franchise agreements involve complex legal issues. You should take advice from a solicitor with franchising expertise. Search for a legal advisor. You can also search for a solicitor.
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Franchise fees and royalties
Initial franchise fees help recover development and marketing costs while continuing royalties or mark-ups provide your profit.
When you franchise your business, you make money from fees the franchisee pays you.
Initial franchise fees
You charge an initial fee for the purchase of the franchise. This fee contributes towards the costs you have in developing and marketing the franchise concept.
Most companies charge an initial fee, which can vary in cost. The fee is based on the cost of setting the franchisee up in business. This initial fee enables the franchisee to invest a larger percentage of their capital in setting up and developing the business.
Continuing franchise fees
Your profits come from the continuing fees that franchisees pay you. Typically, they pay a management service fee based on turnover. If you are supplying them with products or other supplies, you can also profit from the mark-up on the prices at which you sell to them. Both these methods give you a common interest: the more the franchisee sells, the more profits you both make.
Setting the right level of continuing fees requires careful judgement. If the fees are too high, the franchise will not be attractive to new franchisees and existing franchisees might struggle to keep going. Fees should be based on the services provided by the franchisor and the costs incurred in providing them.
You need to work out:
- How much is the loyalty fee?
- How often is it to be paid?
- Is it a percentage or fixed amount?
- If it is a percentage, what is this based on?
- How does it compare to other franchise systems?
Advertising and marketing fees
Advertising and marketing fees are also usually charged as a fixed percentage of the sales achieved by franchisees. These can range from 1 per cent to as much as 5 per cent of gross sales. These fees are used to fund the regional and national marketing, advertising and brand awareness initiatives that you carry out on behalf of your franchisees.
Your bank may have specialist franchising advisers who can work with you on your franchising business plan and the fees you plan to charge. You may also want to take franchise finance advice from your accountant or a specialist consultant. See choose an accountant for your business.
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Marketing your franchise opportunity
Deciding who you want to franchise with and how to advertise and promote your business to attract potential franchisees.
You need to be realistic about how quickly you can grow your franchise. Although new franchisees usually provide the capital for their operations, you will be involved helping them set up. For example, you will have to run initial training, or provide hands-on support when they first start trading.
This means that you may only be able to cope with one or two new franchisees at a time. You may also prefer new franchisees to be relatively nearby, making it easier to visit them. Many new franchising companies aim for a gradual roll out across the country in this way.
What to include in your franchise offering
Once you have decided what to offer franchises, you need to prepare a franchise prospectus or brochure and update your website. This tells potential franchisees what you are offering and what they can expect. It should include:
-
an explanation of your product or service
-
what franchise territories you are offering
-
what the franchise fees are
-
what financial returns the franchisee might expect
-
information about your experience, franchise package, training, timescales, next steps and application form
Bear in mind that you are generally competing with other businesses to attract potential franchisees. At the same time, think carefully about what kinds of people you want to apply. They should have the finances needed to invest in the business, and the right management skills and attitude.
How to advertise and promote your franchise
To attract franchisees, you may want to:
- advertise in the business opportunities section of a newspaper or on a franchise website such as whichfranchise.com
- utilise social media channels to highlight your offering and engage with potential franchisees - read more on social media best practice for business
- become a member of the British Franchise Association
- recruit potential franchisees at franchising exhibitions
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-
Managing your franchisees
Supporting and motivating your franchisees to grow sales and increase franchising fees.
Franchising your business isn't about selling franchises and then forgetting about them. You have a continuing relationship with your franchisees.
Providing support to your franchisees
You must provide the support detailed in the franchise agreement. This can include:
- helping them with initial set up of their franchise
- providing training in how to run the business
- running national promotional campaigns to increase sales
- helping them manage their business effectively
- innovating to keep your product or service ahead of the competition
- monitoring their performance and processes against the standards contained in the operations manual
Doing all this isn't just a matter of fulfilling your contractual obligations. By supporting franchisees, especially ensuring they have a solid foundation of support and training to prepare them for running the franchise, you help them succeed - and increase the fees you receive.
Motivating franchisees
Although it isn't included in the agreement, you also have a role to play in motivating franchisees. New franchisees can find the early months difficult and may become discouraged. Successful franchisees may reach their own comfort level and stop trying so hard to increase sales. Again, by motivating them you help yourself.
Encourage consistency from your franchisees
At the same time, you need to ensure that they are running their businesses the way they should. One of the keys to building a successful brand is consistency. If different franchisees run their businesses differently, your brand can suffer. Your operations manual should give clear information on the correct procedures.
Last but not least, you need efficient administration to ensure that you collect the right franchise fees.
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Turn your business into a franchise - eight top tips
Our top tips outline how you can successfully franchise your business.
Franchising can be a very effective way of growing your business.
Our top tips outline how you can successfully franchise your business:
1. Explore the options
There are a number of franchising options. The most popular route is business format franchising. This is when you put together a complete business package for a franchisee. Read more about franchising options.
2. Consider the advantages and disadvantages
Gain an understanding of the advantages and disadvantages of franchising. This will help you to decide if franchising is a suitable option to help you expand your business - see advantages and disadvantages of franchising your business.
3. Market test your franchise format
To franchise your business, you need to convince potential franchisees that they will make money. A good way of proving that your franchise business model is sound is by market testing to show demand for your product or service. It is also advisable to test a pilot franchise operation to find out if your franchise model works. This will also give a franchisees a good indication of likely set-up costs, break-even points and how long it will take to become profitable.
4. Develop a franchise operations manual
A franchise operations manual should give detailed information on how to set up and manage a new outlet. It will highlight key information to help the franchisee establish their franchise outlet. The manual will help to ensure that quality and consistency is maintained. See develop your franchise format.
5. Produce a franchise agreement
A formal legal contract is one of the most important aspects when franchising your business. It will clearly set out the rights and obligations for both the franchisor and the franchisee. You should seek legal advice when drawing up your franchise agreement. See the franchise agreement for a franchisor.
6. Set your fees
When you franchise your business you will make money from the fees the franchisee pays you. You will normally charge an initial fee for the purchase of the franchise and then charge continuing fees. It is important that you set the right level of continuing fees. If the fees are too high the franchise will not be attractive to new franchisees and existing franchisees might struggle to keep operating. Find out about franchise fees and royalties.
7. Market your franchise
You should prepare a franchise prospectus or brochure to inform potential franchisees what you are offering and what they can expect. You should include details of your products or services, franchise territories, fees and financial returns. Read more on marketing your franchise opportunity.
8. Manage your franchisees
Franchising your business isn't about selling franchises and then forgetting about them. You must maintain a continuing relationship with your franchisees. You should provide ongoing support to your franchisees and help motivate them to sell your products and services. See managing your franchisees.
For further information see our guidance on franchise your business and our video case study turning my business into a franchise - the Zip Yard (video).
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Franchise your business
Turning my business into a franchise - the Zip Yard (video)
Brian Kielt, director and co-founder of the Zip Yard, explains in this video how he turned his business into a franchise.
Brian Kielt, director and co-founder of the Zip Yard, explains how he turned his business into a franchise.
The Zip Yard is a clothing alterations franchise. The first shop opened in Belfast in 2005, and the first franchise store opened the following year. Zip Yard stores can now be found throughout the UK and Republic of Ireland. The Zip Yard franchise has plans to enter new markets including Europe, the United States and Australia.
Here Brian explains how he started the Zip Yard, and the support offered to new franchisees. He shares his experience of running a franchise - including the importance of offering training, signing a franchise agreement and having a strong business brand.
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The franchise agreement for a franchisor
In this guide:
- Franchise your business
- Franchising options
- Advantages and disadvantages of franchising your business
- Is franchising right for your business?
- Develop your franchise format
- The franchise agreement for a franchisor
- Franchise fees and royalties
- Marketing your franchise opportunity
- Managing your franchisees
- Turn your business into a franchise - eight top tips
- Turning my business into a franchise - the Zip Yard (video)
Franchising options
Business format franchising, licensing, and agency and distribution agreements.
If you have a successful business and are looking to expand, you might want to open additional outlets. Franchising your business can be a very effective way of doing this. Instead of financing and managing the new outlets yourself, you work with independent franchisees.
Business format franchising
With business format franchising, you put together a complete business package. You then licence this format to franchisees. They run their own businesses, but use your brand and proven business model:
- you provide an operations manual, detailing how to set up and manage a new outlet - see develop your franchise format
- you agree a contract with your franchisee setting out what rights and obligations you each have through the franchise agreement - see the franchise agreement for a franchisor
- the franchisee pays you franchise fees and royalties for the right to use your business concept
- you train and support the franchisee through their start-up period - support could include ongoing marketing, business growth help, regular regional meetings or how to negotiate purchasing contracts
Other franchising arrangements
This guide focuses specifically on business format franchising. However there are other business arrangements which are sometimes also referred to as franchising, including:
- selling a licence allowing someone else to manufacture and sell your product, but without telling them how to run their business
- using an agent, who sells your product on your behalf
- setting up a distribution agreement, whereby you sell your products to another business that then sells them to their own customers
For more information on using agents and distributors, see sales channels to reach your customers.
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Advantages and disadvantages of franchising your business
The benefits and potential drawbacks of using franchising to grow your business.
Franchising is an excellent way of expanding a business that is already successful. However, you should be aware that franchising is not suitable for every business.
Understanding the advantages and disadvantages of franchising will enable you to decide if franchising is a suitable option for your business expansion.
Advantages of franchising your business
Grow your business
Franchising your business can be a cost-effective way to grow your business. You will not have to cover the cost of investing in new premises or staff. Additional sales lead to additional profit and if you retain this in the business, in the long-term, you should have a saleable asset for your future.
Costs
Each franchisee finances their own franchise outlet. While the franchisee meets all the costs and collects the income, you receive franchise fees and royalties or a mark-up on products sold by the franchisee.
Easier management
he franchisees also run their businesses therefore reducing the management demands placed on you. The best franchisees will be highly motivated and have local expertise, making your life much easier.
Develop your brand
The more franchisees you have the better known your brand becomes. Your brand benefits from the capital investment of the franchisee.
Motivated franchisees
Franchisees are likely to be more motivated than a manager as they have a vested interest in the success of their business and therefore the success of your brand.
Purchasing power
A larger business is more secure and additional turnover and profit can provide access to better deals for office equipment, vehicles and other business purchases.
Ideas for future success
Franchisees can contribute fresh ideas for the future success of the brand maybe outlining opportunities that you might not have identified otherwise.
Support from others
Being a business owner can be isolating so having a franchise network can offer support and advice.
Disadvantages of franchising your business
Not a fix for a failing business
Franchising is not a solution to provide injections of capital from other people when a business is in difficulty. You should only go down the franchise route if you already have a successful business up and running.
Costs
Franchising your business will involve significant financial investment at the outset to get a successful franchise model in place for future growth of the business including investment in preparing legal documents, operations manuals, marketing materials and recruitment.
Time
Franchising will take a lot of time investment especially when initially setting up the franchise model. You will also have to take the time to ensure you attract the right franchisees and control what they do.
Training and support
You will have to develop and deliver a suite of training and support for your franchisees to successfully sell your brand. Businesses need to have systems and procedures in place that can be copied by most people to run a successful business.
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Is franchising right for your business?
Offering franchisees a successful business model, and having the right resources and skills.
Many businesses have used franchising successfully, including well-known names like McDonalds, Clarks Shoes, Domino's Pizza, Reeds Rains estate agencies, Thorntons, Subway, Toni & Guy, Costa coffee and the Zip Yard. However, franchising doesn't suit every business.
Successful business
To start with, your business needs to be successful. Nobody will want to buy the right to franchise a business that doesn't make money. A franchised business needs to be profitable enough to make money for both the franchisee and you.
Replicated in different locations
Your business needs to be one that can be replicated in different locations by your franchisees. Businesses that need high skills levels or professional qualifications can be more difficult to franchise but a number of major optician chains have succeeded in doing so.
An attractive franchise
At the same time, you need to offer your franchisees something that makes it worth their while paying you, instead of simply setting up their business independently. For example, you might have a recognised brand name, provide equipment or supplies they need, or help with training and marketing support.
Having a well-organised and well-run franchise helps you recruit franchisees and is a strong incentive for franchisees to remain part of the franchise at the end of the initial franchise period.
It's worthwhile gaining an understanding of what franchisees look for when assessing opportunities to buy a franchise.
Your resources
You also need to think about the demands franchising places on you. You need to invest in developing and marketing the format. If you have limited financial resources, or are already working flat out running your business, you may not be able to do this.
Skills and motivation
Finally, you need to have the right skills and attitude to make franchising a success. You need to be able to sell your concept to potential franchisees, and to work with and control them. Rather than dealing directly with customers yourself, you profit by helping your franchisees to be successful.
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Develop your franchise format
The franchise operations manual, and protecting your brand.
To franchise your business, you need to convince potential franchisees that they will make money. Franchisees will want to see evidence that the business model is sound, that you deliver what you have committed to in the franchise agreement and that they can make a good living running a franchise. You do this by having a successful business, and an operations manual that shows how franchisees can replicate it.
Demonstrate demand for your product or service
Market testing is an important part of this. If you cannot prove that there is a demand for the product or service your franchisees will be offering, they will be doomed to failure.
If you can demonstrate a clear demand for your product and service, you then need to prove that the franchise model works through the establishment of a pilot franchise operation. The pilot franchise operation will establish that all the back-up systems including training, operating manuals, financial support and marketing campaigns are effective. It will also give franchisees an indication of likely set-up costs, break-even points and how long it will take to become profitable.
Franchise operations manual
The franchise operations or operating manual gives detailed information on how to set up and manage a new outlet. It highlights key information such as:
- company information, key personnel and history
- identifying the franchisee's responsibilities
- how a franchisee sets up a franchise including staff recruitment and office equipment
- main operating requirements
- main management requirements
- how franchisees ensure quality and consistency within their franchise
- customer service standards
- performance reporting and benchmarks
- training and support
- pricing, sales and marketing
The work involved in writing your franchise operations manual is quite extensive. Read British Franchise Association guidance on franchising.
Protecting your brand
Your brand is likely to be an important part of what you offer franchisees. Even if they know how to run a successful outlet, they stay with you because your brand helps them attract customers. Protecting your brand is essential. Read more on branding for your business.
It is important that you put in place relevant protections to prevent your intellectual property (IP) being infringed (for example by registering your trade marks and company name or obtaining patents for your products). Once you have adequate protections in place you can then benefit from licensing your intellectual property. It is also easier to protect your IP if it is registered and you can prove ownership.
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The franchise agreement for a franchisor
A clear contract sets out what rights and obligations you and the franchisee have.
When you franchise your business, you - the franchisor - enter into a legal agreement with the franchisee. A clear, written contract known as the franchise agreement is essential.
The franchise agreement sets out what rights and obligations you each have. Key issues include:
- what geographical location the franchisee can operate in and whether they have exclusive rights in that location
- what rights the franchisee has to use your intellectual property - eg your trade marks
- what restrictions there are on what the franchisee can do
- what fees the franchisee will pay
- how you will support and train the franchisee initially
- what continuing support you will provide - eg national marketing campaigns or administrative support
- how long the franchise lasts and what happens at the end of the term
- what happens if either of you wants to end the agreement to an end or if you wnat to sell your business
Agreements tend to be in favour of the franchisor. However, if the agreement is too one-sided in the franchisor's favour, it will be difficult to attract potential franchisees.
Seek legal advice
Franchise agreements involve complex legal issues. You should take advice from a solicitor with franchising expertise. Search for a legal advisor. You can also search for a solicitor.
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Franchise fees and royalties
Initial franchise fees help recover development and marketing costs while continuing royalties or mark-ups provide your profit.
When you franchise your business, you make money from fees the franchisee pays you.
Initial franchise fees
You charge an initial fee for the purchase of the franchise. This fee contributes towards the costs you have in developing and marketing the franchise concept.
Most companies charge an initial fee, which can vary in cost. The fee is based on the cost of setting the franchisee up in business. This initial fee enables the franchisee to invest a larger percentage of their capital in setting up and developing the business.
Continuing franchise fees
Your profits come from the continuing fees that franchisees pay you. Typically, they pay a management service fee based on turnover. If you are supplying them with products or other supplies, you can also profit from the mark-up on the prices at which you sell to them. Both these methods give you a common interest: the more the franchisee sells, the more profits you both make.
Setting the right level of continuing fees requires careful judgement. If the fees are too high, the franchise will not be attractive to new franchisees and existing franchisees might struggle to keep going. Fees should be based on the services provided by the franchisor and the costs incurred in providing them.
You need to work out:
- How much is the loyalty fee?
- How often is it to be paid?
- Is it a percentage or fixed amount?
- If it is a percentage, what is this based on?
- How does it compare to other franchise systems?
Advertising and marketing fees
Advertising and marketing fees are also usually charged as a fixed percentage of the sales achieved by franchisees. These can range from 1 per cent to as much as 5 per cent of gross sales. These fees are used to fund the regional and national marketing, advertising and brand awareness initiatives that you carry out on behalf of your franchisees.
Your bank may have specialist franchising advisers who can work with you on your franchising business plan and the fees you plan to charge. You may also want to take franchise finance advice from your accountant or a specialist consultant. See choose an accountant for your business.
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Marketing your franchise opportunity
Deciding who you want to franchise with and how to advertise and promote your business to attract potential franchisees.
You need to be realistic about how quickly you can grow your franchise. Although new franchisees usually provide the capital for their operations, you will be involved helping them set up. For example, you will have to run initial training, or provide hands-on support when they first start trading.
This means that you may only be able to cope with one or two new franchisees at a time. You may also prefer new franchisees to be relatively nearby, making it easier to visit them. Many new franchising companies aim for a gradual roll out across the country in this way.
What to include in your franchise offering
Once you have decided what to offer franchises, you need to prepare a franchise prospectus or brochure and update your website. This tells potential franchisees what you are offering and what they can expect. It should include:
-
an explanation of your product or service
-
what franchise territories you are offering
-
what the franchise fees are
-
what financial returns the franchisee might expect
-
information about your experience, franchise package, training, timescales, next steps and application form
Bear in mind that you are generally competing with other businesses to attract potential franchisees. At the same time, think carefully about what kinds of people you want to apply. They should have the finances needed to invest in the business, and the right management skills and attitude.
How to advertise and promote your franchise
To attract franchisees, you may want to:
- advertise in the business opportunities section of a newspaper or on a franchise website such as whichfranchise.com
- utilise social media channels to highlight your offering and engage with potential franchisees - read more on social media best practice for business
- become a member of the British Franchise Association
- recruit potential franchisees at franchising exhibitions
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Managing your franchisees
Supporting and motivating your franchisees to grow sales and increase franchising fees.
Franchising your business isn't about selling franchises and then forgetting about them. You have a continuing relationship with your franchisees.
Providing support to your franchisees
You must provide the support detailed in the franchise agreement. This can include:
- helping them with initial set up of their franchise
- providing training in how to run the business
- running national promotional campaigns to increase sales
- helping them manage their business effectively
- innovating to keep your product or service ahead of the competition
- monitoring their performance and processes against the standards contained in the operations manual
Doing all this isn't just a matter of fulfilling your contractual obligations. By supporting franchisees, especially ensuring they have a solid foundation of support and training to prepare them for running the franchise, you help them succeed - and increase the fees you receive.
Motivating franchisees
Although it isn't included in the agreement, you also have a role to play in motivating franchisees. New franchisees can find the early months difficult and may become discouraged. Successful franchisees may reach their own comfort level and stop trying so hard to increase sales. Again, by motivating them you help yourself.
Encourage consistency from your franchisees
At the same time, you need to ensure that they are running their businesses the way they should. One of the keys to building a successful brand is consistency. If different franchisees run their businesses differently, your brand can suffer. Your operations manual should give clear information on the correct procedures.
Last but not least, you need efficient administration to ensure that you collect the right franchise fees.
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Turn your business into a franchise - eight top tips
Our top tips outline how you can successfully franchise your business.
Franchising can be a very effective way of growing your business.
Our top tips outline how you can successfully franchise your business:
1. Explore the options
There are a number of franchising options. The most popular route is business format franchising. This is when you put together a complete business package for a franchisee. Read more about franchising options.
2. Consider the advantages and disadvantages
Gain an understanding of the advantages and disadvantages of franchising. This will help you to decide if franchising is a suitable option to help you expand your business - see advantages and disadvantages of franchising your business.
3. Market test your franchise format
To franchise your business, you need to convince potential franchisees that they will make money. A good way of proving that your franchise business model is sound is by market testing to show demand for your product or service. It is also advisable to test a pilot franchise operation to find out if your franchise model works. This will also give a franchisees a good indication of likely set-up costs, break-even points and how long it will take to become profitable.
4. Develop a franchise operations manual
A franchise operations manual should give detailed information on how to set up and manage a new outlet. It will highlight key information to help the franchisee establish their franchise outlet. The manual will help to ensure that quality and consistency is maintained. See develop your franchise format.
5. Produce a franchise agreement
A formal legal contract is one of the most important aspects when franchising your business. It will clearly set out the rights and obligations for both the franchisor and the franchisee. You should seek legal advice when drawing up your franchise agreement. See the franchise agreement for a franchisor.
6. Set your fees
When you franchise your business you will make money from the fees the franchisee pays you. You will normally charge an initial fee for the purchase of the franchise and then charge continuing fees. It is important that you set the right level of continuing fees. If the fees are too high the franchise will not be attractive to new franchisees and existing franchisees might struggle to keep operating. Find out about franchise fees and royalties.
7. Market your franchise
You should prepare a franchise prospectus or brochure to inform potential franchisees what you are offering and what they can expect. You should include details of your products or services, franchise territories, fees and financial returns. Read more on marketing your franchise opportunity.
8. Manage your franchisees
Franchising your business isn't about selling franchises and then forgetting about them. You must maintain a continuing relationship with your franchisees. You should provide ongoing support to your franchisees and help motivate them to sell your products and services. See managing your franchisees.
For further information see our guidance on franchise your business and our video case study turning my business into a franchise - the Zip Yard (video).
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Franchise your business
Turning my business into a franchise - the Zip Yard (video)
Brian Kielt, director and co-founder of the Zip Yard, explains in this video how he turned his business into a franchise.
Brian Kielt, director and co-founder of the Zip Yard, explains how he turned his business into a franchise.
The Zip Yard is a clothing alterations franchise. The first shop opened in Belfast in 2005, and the first franchise store opened the following year. Zip Yard stores can now be found throughout the UK and Republic of Ireland. The Zip Yard franchise has plans to enter new markets including Europe, the United States and Australia.
Here Brian explains how he started the Zip Yard, and the support offered to new franchisees. He shares his experience of running a franchise - including the importance of offering training, signing a franchise agreement and having a strong business brand.
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