Once an individual makes the monumental decision to purchase a business, they are often faced with choosing between buying an existing business or a new franchise.
In previous articles, I’ve outlined many of the advantages of buying an existing business. For example, a good existing business includes a proven track record of sales and profits, a well-known name and location, a strong mix of products and services, a group of knowledgeable employees and a good customer base.
Buyers will be able to use the business’ established customers for immediate cash flow and the base for future business growth.
Also, because of seller financing, the new buyer is able to leverage their buying potential into a larger business with bigger cash flow. Plus, with seller financing, the seller will want to ensure a smooth transition to ensure the buyer’s success.
Finally, buyers of exiting business will have full control of the company’s strategic direction without having to share the profits with anyone else.
Naturally, there are also benefits associated with buying a new franchise too.
Buyers are able to purchase an established business plan with step-by-step guidelines.
Most franchisors offer training and operational support because of their incentive of the royalty that they will earn from the franchisee. Usually, the franchisee will also have access to other owners for help, ideas and moral support.
Franchise buyers will need to understand the immediate out-of-pocket expenses incurred upon purchase. They will need to research what other fees they will be responsible for paying after close of escrow.
Buyers will likely have to pay the franchisor a royalty as a percentage of their sales, and they may also be required to lease equipment, purchase supplies or services directly from the franchisor.
Buyers will need to explore the level of regional protection they will have. What are the franchisor’s guarantees that they will not sell other franchises in the area – and for how long?
Unpleasant as it may seem, buyers need to know what the franchises’ failure rate and how many close within the first two years.
Understanding the turnover rate of franchise ownership will also help paint a picture.
Regardless of the purchase decision, a buyer not only needs to have a plan going into the business, they should also have an exit strategy as well. Franchise buyers especially need to understand the restrictions they will have when they decide to sell.