When deciding to buy a business, prospective buyers sometimes are faced with the following choice: Do I buy an existing independent business or do I start 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’ established customers for immediate cash flow and as the base for future business growth. This will help eliminate what often can 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, because of the seller financing the transaction, the seller will ensure that there is a smooth transition to make sure the buyer is successful.
Finally, buyers of existing businesses will have full control over the company’s strategic direction without having to share their profits with anyone else. However, there are benefits to starting a new franchise, too.
Buyers are able to purchase an established business plan with step-by-step guidelines. Most franchisers 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 will 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.
Franchise buyers will need to understand all the immediate out-of-pocket expenses they will incur upon their purchase, both with the franchiser and the landlord. Buyers will need to explore the level of regional protection they will have.
Unpleasant as it might seem, buyers need to know what percentage of the franchises they are considering purchasing fail each year and how many close within two years. Understanding the turnover rate of franchise ownership will also help paint a picture of attractiveness. As with purchasing any business, a franchise buyer not only needs to have a plan going into the business, they should have an exit strategy as well. They need to identify what kinds of restrictions they will be under when they decide to sell.