Is buying an existing franchise a good idea?
Is it a good idea to buy an existing business or franchise?
The short answer to this question is it depends. There are many things to consider and you must do your research and homework in order to determine if it makes sense for your own personal situation.
One of the big disadvantages of buying a new start-up location is the time required to build your business into one that is profitable and will generate enough income to meet your needs. It can sometimes take several years before the franchise owner is realizing consistent profits.
Another obstacle with a new franchise is it can take several months from the time you choose the franchise to invest in and when you actually open your doors. Finding the right location can take time and then you must negotiate your lease and build out your location. If you choose a service franchise you can usually open more quickly, but you still need to spend time cultivating your customer base.
It would be ideal if you could skip all of the waiting and the hard work of building your sales and just purchase an existing franchise that is already profitable. Unfortunately, it’s not always easy to find a resale that makes sense.
First you must find an owner that is willing to sell. The next thing you, the potential buyer, needs to do is to investigate the franchise company in order to make sure it is a company you are comfortable partnering with for the next several years. You want to make sure you agree with the business model and the basic philosophy of the parent company. If you don’t agree with the direction the parent company is taking or if there are other factors you do not agree with, then it wouldn’t make sense to purchase an existing unit no matter how attractive the opportunity might seem.
You will need to thoroughly understand the company’s Franchise Disclosure Document, whichexplains in detail all of the terms of the franchise agreement. You will need to talk to several existing franchise owners to validate how they feel about the system you are considering investing in. If you like what you hear after talking to several existing franchise owners, then it is time to meet with the owner that is selling their business.
When you meet with the current owner you will want to learn several important things. The most important question to ask the owner is why they are selling their business. The owner may be ready to retire, may have health issues that prevent them from operating the business or there may be other reasons. You will need to discover what the true motivation is before moving forward. There may be problems with the location, the lease terms may be unfavorable or there may be problems with excessive competition in the area. Whatever it is, you want to become a detective and find the answers before investing your hard-earned savings.
Assuming you still like what you see and want to move to the next step, you will need to verify the income and expenses of the business. You will need to examine tax returns and other paperwork in order to confirm that the business is doing what the seller says it is doing. You may want to have an accountant or financial adviser review the financial statements for accuracy and reliability.
The final step in the process is to agree on the price and terms. This is when many potential deals fall apart due to unrealistic expectations from both buyers and sellers. The seller wants to sell at the highest possible price and the buyer wants to buy at the lowest possible price. In order for the sale to take place, it must be a good deal for both parties. If the negotiation goes too far in either direction the sale will most likely never move forward.
In most cases, existing businesses will sell for a multiple of two to four times the available “owner cashflow” or annual profits. Those businesses that have a high predictability of future profits will sell for more and those that have a less certain future profitability will sell for less.
When all is said and done, it may make sense to buy a resale if you can find the right situation at the right price. Otherwise, you may be better off to open a new location that will usually require a much lower initial investment.
Lee Thomas, Placing People in the RIGHT Franchise for Their SUCCESS
Franchise Paths to Success
888 701-6413 firstname.lastname@example.org