Starting a business can be a rewarding endeavor. You have control over decisions big and small. Additionally, for those lacking the start-up capital to purchase or rent a location, you can start a business from home with little more than a computer with Internet access. As attractive as this freedom seems, however, starting a business from scratch is not without its pitfalls. For instance, there is a higher rate of failure for new businesses compared to buying an established franchise or business. It takes time and effort to develop your business plan, secure financing, acquire the necessary licenses and get a client base. For these reasons, it’s generally recommended for new business owners to have six months to one year of income set aside while the business gets its footing.
Unless you have a wholly unique business idea, you will likely find yourself in competition with an existing business that has the advantage of brand awareness and customer loyalty. This goodwill is one of the major pros of buying a business for sale or franchise business. With a franchise, you may be working within a proven system and enjoy instant brand awareness and credibility. Additionally, support is generally available to franchisees. Purchasing a standalone business may also have the same benefits. Your experience may vary, not all businesses or franchises for sale are of equal quality.
Support when buying a business vs a franchise
Buying an existing business or franchise generally includes a handover process but after the business has been sold, the previous owners usually will exit from the business after a certain cut off date. Buying into a franchise may also provide you with ongoing technical and managerial support from individuals who are knowledgeable about your specific business as well as the benefit of shared marketing.
Goodwill when buying a business vs a franchise
Standalone businesses will vary when it comes to its goodwill. This will depend heavily on the industry, and the specific business you are purchasing. Your franchise business, however, should be more recognisable from the moment you open its doors for the first time. Also, should you find that you are enjoying great success with your franchise business; expansion is far easier with franchises than with a small business as loans are generally easier to obtain to acquire a franchise. Finally, if it’s the food, hospitality, or retail industry in which you’re interested, franchise businesses have a much greater success rate in all of these areas.
Risks of buying into a franchise
Despite all of the positive elements of being part of a franchise, a new business owner should remember that a franchise business is not a guarantee for success, and buying into one is generally quite costly. A franchise business requires the same initial investment as a new business where location, supplies, inventory, and employees are concerned, but it has the added cost of a franchise fee which varies widely but can be as much as several hundred thousand dollars. You’ll want to examine the turnover of units in the company. How many franchisees have left the company and why? Was it due to failure or the sale of a successful unit to a new owner? The answer to this question can help determine—at least partially—how successful you might expect your unit to become.
Another factor that should be a red flag for a prospective franchisee is, after your due diligence and research, the franchisor cannot come up with any substantial numbers concerning things like sales and profits for a similar store/location. If it seems that this issue is being skirted around, another franchise or business may be a better option. Additionally, before buying a franchise business, you should speak to other franchisee owners to gauge their opinion of the franchise. Are they happy with the support provided to them by the company? Are they pleased with the success of their own units? A preponderance of unhappy franchisees suggests that you may be unhappy in this franchise as well.
Finally, although it seems simple enough, a brief look into whether your cultural and moral values mesh with those of the franchise might be easily overlooked.
