Pros and cons of buying an existing franchise

04/07/2018 08:00 | Start a business

Buying an existing franchise

What’s better than buying a franchise? Could it be choosing to invest in an existing franchise for sale instead?

Well, there are many reasons why this could be the right decision for you. After all, when you buy a new franchise, you’re bringing a new brand, product or service to an area. The company may have successful franchises in other locations, but that's no guarantee that it will work for you.

Whereas, if you get presented with the opportunity to buy an already operational franchise which has performed well, you can have more certainty that you’ll succeed. These opportunities arise when a current franchise owner decides to retire, move away, or wants to realise their capital resulting in an existing franchise for sale.

As with any business decision, there are pros and cons to buying a franchise which is already up and running.

Reasons why you should buy a resale

There are many advantages to purchasing an existing franchise for sale:

1. You can get started almost immediately

As the business is already up and running, you may be able to start doing business straight away, therefore, generating cash flow from day one. In contrast, buying a franchise that is not established will see you having to choose the right location and dealing with all the issues that come with this. Having to research different areas and then fitting out your chosen premises may see you have to wait up to a year before you can start doing business.

2. You can operate in your chosen location.

You may want to start a business in your local community, but there are already several successful franchises in your area. If this is the case, you might think that you'd have to choose another brand to invest in or a different area to trade in, but your luck might be in if an existing franchise is available to purchase.

3. You inherit an existing customer base.

One of the toughest parts of starting a new business is building a robust customer base. To raise awareness for your brand you need to spend time and money on expensive marketing and promotional activity. However, when you purchase an existing franchise, you’ll take over customer relationships along with the income that this generates. This will enable you to achieve the turnover of an established business rather than that of a start-up.

4. You inherit trained employees too

If your franchise needs employees to operate it, you’ll also inherit staff members who are happy to continue to work for you as the new owner. This saves you from having to recruit and train new members of staff. Having the knowledge and support form a team of employees already in situ will be a valuable asset to your franchise.

5. You know what to expect.

Instead of having to guess whether your franchise will be successful, you can review actual performance and financial data to establish whether or not it will make a sound investment. It’s much simpler to assess a known entity than a start-up.

Reasons why you should be wary of buying a resale

Of course, as well as advantages of buying an existing franchise there are disadvantages too. When assessing whether a franchise resale is the right route for you, you should consider the following:

1. Extra due diligence may be needed

As well as the usual research that you’d perform if you were buying a new franchise, you should also ask the following questions:

  • Why is the franchisee leaving the business?
  • Will the current staff remain working in the franchise?
  • Has the franchise consistently performed well?
  • Are there any changes or developments planned for the local area which may affect the future profitability of the franchise?

The more informed you are before you sign the franchise agreement, the better.

2. An additional investment could be required.

If the business has been neglected, you should be prepared to spend some money on top of the purchase price to ensure that it becomes one of the successful franchises.

3. Understand what you can bring to the franchise

You need to reflect honestly about how your skills and experience will impact the success of the franchise. If a franchise has not been performing well, you may be confident that you can turn things around. However, if the franchise is very lucrative, you need to consider how your way of doing things will affect its performance. Understand how much of the franchise's success is down to the existing franchisee.

4. You must review the franchise agreement.

During your due diligence, you’ll undoubtedly ask the existing franchisee many questions. But you mustn’t assume that the franchise agreement, fees and terms will be the same for you as it was for them. The franchisor has the right to change all elements of the franchise agreement if they wish and these amendments may be more significant than you first realised. Remember, it’s always recommended that you seek the advice of a franchise solicitor to review the franchise agreement and lead any negotiation discussions if necessary.

5. Be prepared to pay a transfer fee.

It’s unlikely that you’ll be expected to pay a franchise fee, but the franchisor may charge a transfer fee that either you or the selling franchisee must pay. You may also be required to pay for your initial training too as this is a cost that the franchisor wouldn’t have had to cover if the existing franchisee had chosen not to leave.

Investing in an existing franchise is a great way to start your own business. There are many benefits, but you should be aware of the pitfalls too. Just as with any franchise purchase you must ensure that you do your homework and consult a solicitor who specialises in franchising before you sign on the dotted line.

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