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If you are considering buying a franchise, you need to decide if you want to buy an existing business or open a new one. Often, sellers of existing franchises have successfully operated their business for many years and are looking to do something new. However, in some cases, the franchisee may have struggled to make the business profitable. This makes it important to consider the state of any existing franchise you are looking to purchase. This article explores the key pros and cons of buying an existing franchise.
Pros
Access to Financing
It is no secret that you need finance to purchase an existing franchise. This is often easier when there is an existing business with historical financial information to examine. Although there is no guarantee the business will perform the same under your management as it did with the previous owner, banks may feel more confident when they can look to a franchise with prior revenue. Accordingly, obtaining a loan might be less complicated.
If you have limited capital to work with, buying an existing franchise might be a better option.
Time Saved
Another key benefit of buying an existing franchise is that it is already up and running. This is generally easier than opening a new location from scratch, which would require you to:
- choose a territory;
- find a premises;
- negotiate a lease;
- fit out a site;
- hire and train staff; and
- establish a customer base.
Access Existing Customers
One advantage of buying an existing franchise is access to an existing customer base. This is particularly an advantage where the business has established goodwill, which is often reflected in the revenue of the business.
On the other hand, most new franchisees will have to build up loyalty and a customer base over time. With pre-existing customers, revenue levels will be higher from the get-go.
Reliability
One of the main reasons people look to open a franchise is to access a proven business model. This extends to when you buy an existing franchise. Likewise, you get to access a location that is already proven to have some degree of success.
Where the local market has already accepted and used the franchise, you can have more reassurance that the site will succeed compared to setting up an independent business.
This publication provides you with the fundamentals for franchising your New Zealand business, including set up, branding and management.
Cons
Price
One major downfall of buying an existing franchise is that successful, pre-owned businesses usually cost significantly more than building a new one from scratch. Although an existing franchise might come with quicker revenue streams, this does not always balance out the cost of the business. As such, you must carefully consider where to invest your money to create the best returns.
Hidden Issues
Before buying an existing franchise, you need to carefully consider why the existing franchisee is selling it. Consider the following key questions to ask:
- Are profits low?
- How have profits compared with other franchisees?
- Does the store in question have a poor reputation?
- Does the brand have a poor reputation?
- Is the location poor?
- Has the business been sold previously? If so, how recently?
There is a reason that the franchise owner is selling their business. While it might be the case that they just want to move on or retire, you should be sure that you are not buying a poorly run business with a number of hidden issues. Conducting proper due diligence is, therefore, essential.
Adjustment Issues
Another potential issue with buying an existing franchise is that organisational change is difficult for all parties involved. For example, your employees might struggle to adapt and existing customers might also be resistant to the change. As such, employee and customer turnover should be expected, and you should plan accordingly.
Continue reading this article below the formKey Takeaways
If you are thinking about buying a franchise, you will inevitably have to decide if you want to buy an existing business or establish a new site. There are several pros and cons to this decision. Some of the pros of buying an existing franchise include:
- access to financing;
- the business is already up and running;
- access existing customers; and
- ability to rely on an existing business model.
On the other hand, some cons of buying an existing franchise include:
- high cost;
- hidden issues; and
- potential adjustment issues.
If you need help deciding if buying a franchise is for you, 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
Buying an existing franchise includes access to financing and the ability to buy into a business that is already up and running. Other benefits include having access to existing customers and relying on a proven, existing business model.
Some downsides of buying an existing franchise include the potentially high cost and that there might be hidden issues. Further, some customers and staff might have difficulty adjusting to the new change.
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