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What are some of the advantages or disadvantages of buying an existing franchise vs. a new franchise?

I notice that there are some franchise opportunities to purchase existing franchises. Can someone tell me how that works? Would I be buying it from the owner of the franchise or the franchise? What are the pros and cons of purchasing a new franchise. Any advice would be appreciated.

K

K Larsen

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Answers (7)
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May 31, 2017
Jon Holmquist
Edgemaster Model 400 sharpener
President
Marion County, OR

K Larsen, every one has pretty well answered the question, but make sure you talk to current customers and make sure the business hasn't had the name ruined by a bad 'zee. I bought a business (not a franchise) one time and paid extra to get his name. Only to find out that no one liked him or the way he did business. I immediately changed the name and started fresh. That was not all lost as I helped get him out of the business and proved to the customers that I was better than he was. That is one reason the franchisess we select now have proper training not only in sharpening but in customer service and follow-up. Edgemaster Mobile Sharpening doesn't accept just anyone who has $$$ to invest but must have an excellent chance of making everyone glad to have them aboard. Then like the man says, other franchisees will be happy to purchase the business from the seller. Good luck, Jon at Edgemaster.

Sep 13, 2009
Eric Little
Right at Home, Inc.
SVP
Douglas County, NE

Ms. Larsen - since it's been a few months since you posted this question, I will assume that you made your decision and I hope that it worked out well for you :). For benefit of others that come across this thread, I will add another perspective. When buying an existing business, you also need to consider your goals. I know that sounds very basic, so let use an example. Let's say you buy a business that is operating at $1,000,000 in sales, has $150,000 in EBITDA, and you paid $500,000 for it. And let's assume that the system average for this particular franchise is also around $1,000,000 in sales per year, and that there are 300 other franchisees. Ok, back to goals. If your goal is to build equity in something, you would have to somehow increase the bottom line by increasing sales or reducing costs. But if there are 300 other franchisees who average this same amount, your performance would have to be exceptional in order to build equity. Otherwise, if you maintain the level of sales and profitability for a number of years, perhaps with some slight upticks in growth, you'll probably sell it for an amount similar to what you bought it for. The only "equity" you would have per se is the amount by which you paid down the debt during the term of your ownership.

On the other end of the spectrum is the "turnaround" situation. They usually offer low sales prices due to their lack of profitability. It's a risk/reward equation - it's higher risk b/c the profitability is not there yet, but the rewards are higher if you grow the business and sell it at the peak.

Whichever route you decide, just make sure you have a good team of advisors helping you with the due diligence.

Good luck!

Jun 16, 2009
Fayaz Karim, MBA, CA
Subway Valuations, Business Searches
Consultant
Orange County, CA

Great question, rght up my alley and answered on my website
Mainly boils down to your risk tolerance and need for immediate cash flow

Fayaz Karim, MBA, CA

Apr 3, 2009
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FRANCHISE CONSTRUCTORS

One nice thing about buying an existing franchise is that the owner has proven the concept will work in the area it is located in and you can see the cash flow. It is always nice to take over a business that has a solid P@L . A new franchise means you can burn cash to get it to break even and you could get a location that never breaks even, so you burn cash until you close the business. What I have seen over the years is that a really good franchise never hits the market because other franchisees are aware that the business is for sale and they will buy it. That is the advantage of a franchise over an independent business, you can sell to someone that understands your business and knows the system...

Apr 2, 2009
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Franchise Advisory Group
PA

I recently wrote a blog about the very same issue and I think it will answer your question and concerns. http://franchiseadvisorygroup.net/blog/view/104/buying_existing_business_vs__start_ups . Most Franchise resales are sold by Franchisees and is no different than if you were buying any non Franchise business. The Advantage there is that most Franchises will put you through the same training as if you were buying a new one. You will still be able to review the FDD and speak to existing Franchisees. Please read my blog for more and better explanation.

Apr 2, 2009
Rob Goggins
Great Clips, Inc.
Vice President of Franchise Development
Carver County, MN

As for pros and cons of buying an existing franchise unit, I'll share this analogy with you; buying an existing franchise is like a rookie pilot taking off from an aircraft carrier. You have minimal training and experience and suddenly you're catapulted off the ship. What happens? The plan drops off the end of the carrier's runway before taking off. Most new franchisees can expect a somewhat similar white knuckle experience, and sometimes a similar "drop" in sales before they understand what's going on and what they have on their hands. Contrast this experience with building your own plane from the ground up, taking flight lessons and slowly getting up to the point where you finally take your solo flight. It takes a lot longer to get to the finish line this way, but it's a smoother/flatter learning curve.

"Tpyical" pros to buying an existing franchise: existing sales, existing profits (not always; do your homework), existing employees (can be a good or not-so-good thing depending on how the previous owner managed them, and what sort of culture you introduce), the business basics have been established such as accounting systems, software, hardware, suppliers, etc. For the most part you can focus on staff, customers and a) fixing what's wrong (if it was underperforming), and/or b) marketing the business and growing it like mad to deliver a decent ROI. If the business has a good reputation it's easier to grow it; if not it will be a bit more of a challenge but can certainly be overcome.

"Typical" pros to buying a new franchise: you hire your own staff that meets your criteria, you implement your own policies and work culture, you set up your own systems and procedures, you select your own suppliers (depending on the franchise agreement) and you build it on your own - sort of like viewing any project after you worked hard on it. There's a feeling of accomplishment when you do it on your own.

In most franchise resales you're simply purchasing the assets of the business. Most franchise agreements will state that the customer list belongs to the franchisor. Some franchise companies will allow you to take over the remainder of the seller's agreement term; others will require you to sign the then-current full term franchise agreement. Larger, established franchise companies are going to have more experience in this arena because they handle more of these transactions. They should have plenty of resources for you to learn more about franchise resales.

Mar 25, 2009

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