Tips on Buying an Existing Franchise

Buying an existing franchise has some key advantages over buying an existing main street business.  Like all business decisions, the short term and long term goals of the purchaser should determine the right fit for a business to buy.  If the buyer’s goal is lifestyle, control (compared to a job) and predictable cash flow than a franchise has some distinct advantages.  However, there are also some hidden cost and considerations that are unique to franchise transfers.

Advantages.  For one, there is more predictability with a franchise and more comparative numbers available than an existing independent business.  A buyer of a franchise can look to other open locations within the system to get a sense of cost percentages, revenue potential and ease of management.   The training curve is also more predictable as the franchisor, who has a vested interest in the buyer’s success, will take on the bulk of the post sale training duties.   The buyer can speak to and learn about other transfers to find out how much of the goodwill of the business will transfer from one owner to the next by looking at similar transactions in other parts of the country.  That is difficult if not impossible to do with main street independent businesses.

Hidden cost and unique considerations.  However, the lower risk and higher predictability of a franchise isn’t cost free.  A franchisee buying into a system, especially a mature system, will not be able to expand unilaterally without approval (and cost) from the franchisor.  The entrepreneur who wants to buy a company and tinker with it endlessly to make it their own will be frustrated as a franchisee.  They need to recognize that when they sign a franchise agreement they really entered into a partnership, and they are the junior partner.  The buyer should also research and build in the potential future cost of being part of the system.  If the franchisor requires a major remodel for instance at regular intervals, or can dictate new equipment, product lines or other methods of operations six months after they buy the business that will drive up cost and the new buyer should budget accordingly.

Franchising is probably the best invented way to share business knowledge between the founders and inventors of knowledge and local entrepreneurs looking for a system to build a business to be executed locally.  But both parties have to recognize their interdependence and the cost of their ongoing relationship or neither will be happy and both will suffer.  Every potential buyer should ask one simple question, “will they be a good franchisee and can they work within the system”.  If they won’t, then franchising is not a good fit.

No one should sign a franchise agreement or enter into a franchising relationship without truly understanding what will (or can) be asked of them.  Professional guidance is a must as most franchise agreements will require personal guarantees and many new franchisees will invest their life savings in the venture.  There is too much at risk to go in without your eyes wide open.

Posted In: Franchising
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