If you are thinking of buying a business, franchises have a lot of appeal. They have a track record. Many are household names. Most have an operating manual that gives you the information on how to operate the business. If you need assistance, they have people available to help you. But, should you buy an existing franchise for sale or open a new franchise location?
The first thing you should recognize is that buying a franchise, no matter how many there are or how well known they are, is not a guarantee that you will be successful. Just like a non-franchise business, there are successful franchises and unsuccessful franchises. The same is true of individual locations.
As part of the process of buying a franchise, you will receive a Franchise Disclosure Document. Franchises are required by law to give you a copy before you buy a franchise.
This document has important information! Read it. It will give you information about conflicts between the franchisor and the franchisees. It will tell you how many new franchises were sold and how many closed. It may give you information on how much an average franchisee does in sales or earnings. It will give you a list of the franchisees. Contact several and ask them questions about the franchise. Do your due diligence.
The primary reasons to buy an existing franchise are the same reasons you buy an existing business – to reduce the risk of going into business and to start out with employees, customers, and an immediate cash
flow. As I pointed out, buying a known franchise is no guarantee of success. Buying one that is up and running reduces this risk since you can see how the business has been doing. There is no waiting to ramp up and start making money. Both of these benefits are worth something. In many instances, you can buy an existing franchise at little more than the cost of opening a franchise.
If the franchise is doing well, it is likely that existing franchisees have bought up many of the best territories. In the case of some franchises, when a good franchisee wants to sell, they steer the sale to a good current franchisee so they have a good operator running the business. In this case, their interests are not to get the best deal for the franchisee. Many franchisees recognize this and sell their business through a business broker. Exposing it to the market will usually result in more buyer interest and a higher selling price.
I have to give you a warning. When you talk to the franchisor, they are likely to try to convince you to open a new franchise rather than buy an existing one. We have had this happen to buyers, who were buying an existing franchise, several times. This is self-serving to the franchisor. If you buy an existing franchisee, they don’t gain anything. But, if you open a new franchise, you may be successful and increase the overall revenues of the franchisor. If you are dealing with a local franchise representative, it is likely that they will get a commission on your purchase of a new franchise – but not on a sale of an existing franchise.
There are many good franchises. But, like any business that is started, there is no guarantee of success and how well a new location will do can vary significantly. Give consideration to buying an existing franchise to reduce your risk and start out with employees, customers, and a cash flow.
