Joel Libava
One option-if you’re on the hunt for a franchise to own, is buying an existing franchise. That’s certainly one way to go, and there are definite advantages.
In a moment, I’ll show you a few advantages of *buying an existing franchise, along with why you may want to consider going this route.
*I recently asked subscribers of my free VIP Franchise Newsletter for their suggestions on what they’d like me to write about here. Information on buying existing franchises for sale was one of the topics that came up. Have you subscribed to my newsletter yet?
On Buying An Existing Franchise
If you haven’t yet thought about looking into an established franchise business, maybe you should. Why?
For one, when you purchase an established franchise, you’re looking at a business that’s already bringing in revenue (and hopefully profits, too). There’s more.
Existing Franchises For Sale: Advantages
If you haven’t yet thought about looking into an established franchise business, maybe you should.
Let’s take a look at some of the advantages of buying an existing franchise business that’s for sale.
1. Existing revenue
The cash register (do they even make those anymore?) is opening and closing day in and day out.
Translation: cash is being exchanged for goods and/or services. Business is being done. There’s a franchise owner-a small business owner-on one side of the register and a customer or client on the other side. Good stuff! Especially if you’re on the “taking in cash” side.
2. Profit
In a perfect world, the franchise business you’re investigating is a profitable franchise business. There’s nothing wrong with buying a franchise that’s profitable, right?
But, you won’t have to guess if it’s a profitable business; you can ask the franchise owner how much profit is being made…yourself. And, you can look at the books.
3. Financing
It’s usually easier to get a small business loan for an existing business, as lenders can analyze past performance and make their loan recommendations based on what they’ve discovered. It’s a huge advantage.
4. Cost
When you buy an existing franchise for sale, you’re paying an exact price for the business. There’s no “investment range,” like there is when you buy a franchise start-up business.
And, speaking of price, there are 5 different ways that an existing franchise business can be valued, according to Bizbuysell.com
- Asset Valuations: Calculates the value of all of the assets of a business and arrives at the appropriate price
- Liquidation Value: Determines the value of the company’s assets if it were forced to sell all of them in a short period of time (usually less than 12 months)
- Income Capitalization: Future income is calculated based upon historical data and a variety of assumptions
- Income Multiple: The net income (profit/owner’s benefit/seller’s cash flow) of a business is subject to a certain multiple to arrive at a selling price
- Rules Of Thumb: The selling price of other “like” businesses is used as a multiple of cash flow or a percentage of revenue
5. Risk perception
Most of the people I work think that buying an existing franchise presents lower risk than buying a franchise start-up. That’s because there’s money coming in from day one. There are existing customers. There’s a list of vendors. There’s inventory. Pretty attractive stuff. (Especially the part about money coming in right away!) But, is the financial risk lower? Maybe.
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Bonus: here’s another advantage of buying an established franchise.
A solid foundation.
When you think about it, an established business has worked out the kinks (and with the help of the franchisor), has streamlined its processes.
Bottom line?
You benefit from the seller’s experience without rebuilding everything from square one. In other words, you’re instantly in business.
Disadvantages Of Buying An Established Franchise
Buying a franchise business that’s already established can be a great thing. But, there are some caveats.
1. The franchisor has the final say
You can’t just walk into the pizza franchise around the corner, make an offer to buy it, and automatically become a franchisee.
The reason: the franchisor needs to approve you. It’s not automatic. In most cases, you’ll have to visit franchise headquarters and meet the executive team. They need to feel that you’re a fit for their company…their culture.
2. The books
One would think that because it’s a “franchise” you’re trying to purchase, and there are business systems in place etc., everything you need numbers-wise, will be easy to analyze. That may not be the case. The franchisee may keep sloppy books. But, even if the financial information is well-organized, an accountant will need to crunch the numbers.
3. Employees
In a perfect scenario, some of the current employees will stay on when you officially take over the franchise business. Sometimes it can be negotiated as part of the deal. But, what if they stay on and do you harm?
New owners of any business are pretty naïve. Employees know this, and can and sometimes will take advantage of the situation. Inventory and future profits can literally walk out the door. So be careful.
4. Cost
Buying an existing franchise is a negotiated deal.
In most cases, the price the seller wants for the business will be way more than you think it’s worth.
In addition, the selling price may end up being substantially higher than buying the start-up version of the franchise. You’re going to be paying a premium-unless it’s a distressed business. The revenue you’ll be seeing and getting when you open the doors to your business? You’re paying for it.
Again, you need to hire an accountant who’s familiar with business acquisitions, so you’ll know if you’re paying a fair price for the franchise business.
5. Secrets
You’re going to need to find out why the franchise business is for sale.
The real reason.
In other words, just because the seller “said” the reason for selling is because he or she is ready to retire and move down south, doesn’t mean it’s the reason.
What if the real reason is a hidden reason? What if it’s a secret reason?
Like a reason the owners don’t want to share?
Should You Buy An Existing Franchise?
If you’re thinking of buying a franchise, it wouldn’t hurt to look into existing franchises for sale.
One way to do that is by asking your franchise sales representative at headquarters. She will usually have access to information about any established franchises available in their system.
Finally, there are firms that specialize in franchise resales.
So best of luck on your journey to becoming the owner of a franchise business that’s for sale.
