Insights
The Pros & Cons Of Buying An Established Franchise
April 15, 2022
The franchise business model can offer a great way to own your own business without the risks that are proven to come with start-ups. But owning an existing franchise can undoubtedly come with its share of challenges. So before jumping into a franchise ownership, be sure to consider all the good and bad that you could face before deciding if it’s the right opportunity for you.
The Pros
• An existing franchise comes with a history that you can use to assess its financial data to know whether it is a good business. In addition, you can see all the books to make your determination of possible future performance.
• It can be easier to obtain financing for a business with an existing history of financial performance because lenders have something concrete to go by and, therefore, more confidence.
• You get to skip the time-consuming start-up phases of owning a business, such as creating a business plan, creating a product, doing market research and testing, and figuring out how to scale. With a franchise, this work has already been done for you. Next, you have to make sure it succeeds.
• A franchise comes with a system in place, and you can start doing business right away. Vendors’ relationships are already set up. The customer base already exists, so that revenue will generate faster. In addition, there are established training for employees on all facets of the business, including things such as daily operations and software systems. Many franchise owners find this one of the most appealing things about owning a franchise.
• Instant brand recognition is a huge benefit of owning a franchise. You get the benefits of an already proven and market-tested brand, especially if it is already established locally.
• Typically, you get to negotiate the purchase price when buying an established franchise. New franchises carry a set price and specific terms. But with a resale, you can sometimes negotiate.
• Franchisors often get inventory and equipment for their franchisees in bulk. This means you enjoy a lower cost of inventory, which doesn’t happen with other small business start-ups.
The Cons
• It could be a bit pricey to buy a successful, existing franchise business. Make sure it’s the right opportunity with the proper return on investment for you.
• There are fees that you must pay to own a franchise. There may be a new franchise fee, a transfer fee, training fees, and royalty fees. An initial fee can be pretty hefty. The royalty fees will need to be paid regularly for using the business’s name and systems. You may also have to pay advertising and real estate fees at the franchisor’s discretion.
• Some franchisors have relationships with specific lenders to help finance sales so that you may be stuck with their terms, and getting another third-party financing may be difficult. And financing is never a guarantee.
• Owning a franchise isn’t the same as being your own boss. While there is some autonomy in it, you will still have to follow the franchise’s existing rules, regulations, and systems, and this rarely comes with any say on your part.
• Your franchise will be subject to whatever reputational issues the entire national or global franchise faces. For example, if there is a scandal or a bad publicity incident, it can negatively affect your business.
• You’ll want to know for sure why the existing owner wants to sell their franchise to uncover potential problems with the business. These issues can include low profitability, rising crime around the location, or staffing problems. Be careful that you don’t buy a franchise that has all sorts of hidden issues or even just one big one.
• You might also have to do costly and time-consuming orientation before the franchisor approves your purchase. But, again, you are not going to get this time or money back if you are not approved.
Of course, every situation is unique. Franchising could be an ideal move for you. Just be careful to take a good look at all the terms and conditions, financial performance, and seller motivations. Do your due diligence by asking for financial statements, profit and loss statements, and ensuring there is no pending litigation. Don’t be afraid to ask every last question you can think of because once you purchase a franchise, it can be difficult to reverse course.
Share This Post
Categories
Get These Insights Delivered Directly To Your Email
Explore our curated collection today and stay ahead of the curve in M&A.
Related Posts
How to Attract the Right Buyers: What Makes a Business More ValuableIn the dynamic world of mergers and acquisitions (M&A), selling your business is a complex process that requires strategic planning, valuation expertise, and an understanding of what potential buyers are looking for. Buyers and investors are driven by various motives, including growth acceleration, market expansion, and portfolio diversification. Successfully attracting the right buyers can significantly impact the sale price and the overall success of the transaction. But what exactly can make your business more valuable and appealing to prospective buyers? Let’s explore the key factors that may enhance your company's attractiveness in M&A and how you can position your business for maximum appeal.Why Multi-Party Sale Processes Are an Opportunity for BuyersTo many acquirers, the words “competitive process” still carry an undertone of friction. They suggest distraction, inflated expectations, unnecessary pressure, and the risk of being used as a price tension rather than a serious counterparty. Yet this interpretation often misses the deeper reality. For most business owners, particularly founders and long-tenured operators, a multi-party sale process is not an act of aggression; it is an act of responsibility – to themselves, to the business, and to the buyer.