Franchising is a great way to buy into an already-existing business network and grow a successful business. If you are considering buying a franchise, you will have two main options – either opening an entirely new location or buying a franchise that is up for sale. This article will take you through the advantages and drawbacks of opening vs buying a franchise.
What Are the Costs?
Often, a new franchise will cost less than purchasing an established one. This is because you will be paying less for the franchise’s goodwill.
Goodwill refers to the reputation that a business has built up over time. Although all franchises have a price attached to goodwill, the cost associated with an existing franchise will be much higher, particularly where they have high sales performance and a loyal customer base.
You will need to consider whether the additional costs associated with the goodwill of an existing location are worth it when debating whether you should open a new location or purchase an existing franchise. Although a new franchise will not be able to demonstrate a high sales performance, a franchise with a well-known brand will already have goodwill in a new location before the doors even open.
Should I Consider the Business’s Potential?
Another critical consideration when making your decision is the potential of an existing business compared to that of a new one. If an existing location is already doing well financially, it can be challenging to assess whether you would be able to increase turnover even further.
On the other hand, when you buy a new franchise in a new location, you will start from scratch but have unknown potential. Regardless, it would help if you were realistic about your ability to grow the franchise.
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Depending on your franchise agreement, buying an existing franchise usually means being able to jump straight to work with a team of existing employees. This can make it easier to adjust to the challenges associated with the day-to-day tasks of running the business, making it easier to get used to processes.
However, this means you will also buy a pre-existing work culture. Your staff might be used to doing things a certain way, sometimes inefficiently or entirely incorrectly. Opening a new franchise means you can take the time to build your own work culture, grow at the same time as the business and implement operations in a way that suits you and your management style best.
What Does Gaining Capital Mean?
When you open a franchise from scratch, you pay less for goodwill but are required to develop your own goodwill instead. That means that if you can sell your franchise in the future, the value may have increased, and you will be able to sell it for more. However, this depends on your ability to build a business and turn it into a successful branch worth paying a premium.
Is Location Important For a Franchise?
Location is a prime consideration for all businesses. When buying an existing franchise, you may only purchase a branch already for sale. This may mean you must take over an existing territory or lease.
When taking on an existing lease, you will not have the ability to negotiate the lease terms. Consequently, this limits your ability to assess if the location is a good fit for you and the business. It also means you may end up locked into a term and price for a lease which is not financially suitable.
On the flip side, opening a new franchise means you can open your business wherever it suits you best. However, this is dependent on restrictions that exist about where franchise locations can be opened. For example, a franchise agreement might state that you cannot open a new franchise within a certain radius of an existing one. Your ideal location is already monopolised by someone else, making it unavailable to you.
Will I Need to Pay For a New Fit-Out and Equipment?
When you buy an existing franchise, you can also inherit a fitted-out location. This helps minimise costs associated with buying an entirely new franchise and doing a fit-out entirely from scratch.
The same factors apply to the equipment needed to operate your business. Although buying an existing business means buying used equipment, it helps avoid buying everything yourself, reducing costs significantly. However, this does mean you increase the risk of buying outdated or poorly maintained equipment.
Of course, buying a new franchise will be a more suitable option if you prefer to have all new equipment and a fresh fit-out. In some cases, buying new equipment comes with training, support and guarantees, which can be helpful if you are entering a new field for the first time.
The same concept applies to the equipment you need to operate your business. With a new franchise, you will be provided with the latest equipment. The franchisor will likely select this equipment, and will come with training, support and guarantees.
This publication provides you with the fundamentals for franchising your New Zealand business, including set up, branding and management.
Key Takeaways
Opening a new franchise and buying an existing franchise have advantages and drawbacks. Some key factors to assess when making your decision about the best path for you include:
- cost;
- potential;
- employees;
- capital gain;
- location; and
- fit-out and equipment.
If you need help deciding whether to buy a new or existing franchise unit in NZ, our experienced franchise lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0800 005 570 or visit our membership page.
Frequently Asked Questions
Opening a new franchise and buying an existing franchise have advantages and drawbacks. Some key factors to assess when deciding the best path for you include the costs associated and the location, equipment, fit-out and employees you want. It would help if you also considered the potential each business type has, including as it relates to capital gain.
Franchising is a business model where a business owner (the franchisor) facilitates another person or business (the franchisee) to licence their business operations and intellectual property. This agreement is usually in place for a fixed period in exchange for upfront and ongoing fees.
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