“Most of what we call management consists of making it difficult for people to get their work done.”
— Peter F. Drucker
When deciding to buy a business, prospective buyers sometimes are faced with the following dilemma: Do I buy an existing business, or do I buy a new franchise?
Some of the advantages of an existing good independent business include 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’s established customers for immediate cash flow and as the base for future business growth. This will help eliminate what can often be an extensive and challenging start-up period for owners.
Because of seller financing, the new buyer of an existing business is able to leverage their buying potential into a larger business with bigger cash flow.
Also, due to the seller financing the transaction, the seller will want to ensure that there is a smooth transition to ensure the buyer’s success.
Finally, buyers of existing businesses will have full control of the company’s strategic direction without having to share their profits with anyone else.
There are benefits with buying a franchise, too. Buyers are able to purchase an established business plan with step-by-step guidelines. Most franchisors offer training and operational support due to their incentive of the royalty fees that they will earn from the franchisee.
Usually, the franchisee will also have access to other owners for help, ideas and moral support.
Regardless of which path a buyer chooses to follow, they need to exercise a considerable amount of due diligence. In fact, in many ways a buyer has to ask more questions and do more research when considering purchasing a franchise.
For instance, they will not only need to thoroughly understand the business and the current economic landscape, but they will also need to comprehend all the issues associated with the franchisor.
Franchise buyers will need to understand the immediate out-of-pocket expenses they will incur upon their purchase. They will need to research what other fees they will be responsible for paying. 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? What kind of empire building opportunities will the buyer have? Some of the more successful franchise owners are those who own multiple outlets in the same area and are able to utilize their economies of scale.
Buyers should also find out if they will have first right of refusal for a new franchise. Unpleasant as it may seem, buyers need to know what percentage of the franchises they are considering purchasing fail each year and how many close within the first two years.
Understanding the turnover rate of franchise ownership will also help paint a picture of attractiveness.
As with purchasing any business, a buyer not only needs to have a plan going into the business, but they should also have an exit strategy as well.
Franchise buyers need to identify what kinds of restrictions they will be under when they decide to sell.
Will they be able to sell it to anyone or only to the franchisor? They should also research the comparable sales prices of franchises that have recently sold. Although it is difficult to make blanket statements about which franchise models are better than others, buyers need to understand where their franchisor’s interests lie before they purchase.
Buzz Harris is a Licensed Business Broker with The Liberty Group of Nevada. Contact him at BHarris@TheLibertyGroupofNevada.com.
