Common Misperceptions About Franchise Resales
You want to be in business for yourself. You’re not alone and there’s a veritable library of statistics to prove it. According to the
Global Entrepreneurship Monitor , 66% of people think business ownership is a solid career move and a recent Gallup poll suggests 61% of Americans would prefer to be their own boss versus working for someone else. The numbers are even higher for the entrepreneurial
minded millennial generation. Whether you’re rethinking your retirement or just starting out in life, the drivers are often the same...more flexibility, income growth, decision making control, building wealth and a family
legacy. Sounds great, right? So where do you begin if you’re not an inventor or you don’t have the next 30 years to build a business from scratch? Is buying an an existing business for sale a good idea?
I’ve been in the business brokerage business for over three decades, mostly in the franchising world, so I’ve seen a lot of great opportunities over
the years. I’m often asked, “why not buy an up and running business and hit the ground running?” There are definitely real advantages
to buying an existing franchise, but I suggest prospective business owners also keep their minds open because there are many compelling new franchise
business models emerging and some real advantages to starting your own as well. Buying an existing business is not as simple as purchasing a customer
base and a chunk of monthly recurring revenue. Here are some key factors to consider when exploring your options for a business.
Startup Costs
Depending on the business, the price point of entry will likely be higher than if buying a new franchise, but not always. If an existing business is
just breaking even or is in the red, there may be an opportunity to buy it at a bargain price and turn it around. That’s when you know you’ve found
your diamond in the rough, but be patient because these are hard to find.
Many people think buying an existing business means a shorter runway to profitability and they’re willing to pay more up front for
a quicker payoff. Sure, when a brick and mortar business is already up and running, the ramp up time can be less because you don’t have to source the
real estate, which can often take a year or more in a bustling metropolitan area like Atlanta. On the other hand, you still have a transition and training
period. There will be decisions to make about keeping old or hiring new staff. It’s not just about flipping a switch and turning it on.
Runway to Profitability
It’s important to know why the seller no longer wants the business. Are they retiring, moving on or are there some other challenges? You may be able
to buy the business at a rock bottom price, but turning around a failing existing business can turn out to be a lengthy and costly process. Depending
on the business model, many new franchises can be open for business and growing customers in as little as 90 days.
Existing Client Base and Recurring Revenue
It takes time to build a book of business when you start from scratch. Many existing franchise businesses have an established client base that can
be cultivated to build more business. Others have struggled to build a client base with monthly revenue. Gaining a clear understanding of the client
acquisition and retention model will go a long way to understanding why the business is for sale and whether or not you can make it work.
Brand Recognition and Consistency
If the business has been up and running for some time, it may have a recognized brand and an established presence in the community, especially if there
are other franchisees in the area. While brand recognition is a cornerstone of successful franchises, it’s not the only factor driving profitability.
How does the business service customers? What is their reputation for honesty and integrity? If you have not had a hand in building the reputation
of the business, it will be vital for you to know what you’re getting into.
Staff in Place
Recruiting and hiring staff can take up valuable time and energy as you’re ramping up your business. With an existing operation, you have the chance
to walk in with a team in place on day one. The downside is that you may not jive with the existing team. Replacing and training them will take time.
You’ll want to spend some time with the current owner and staff to gauge just how tethered they are to the business.
Transparency
Franchising is regulated by the Federal Trade Commission, which
means franchise businesses businesses are inherently more transparent, which makes them especially attractive to first time business owners. Franchise
businesses can be thoroughly researched before any significant investments are made, which isn’t always the case with a new business startup (non-franchise).
This information and much more is presented to you in the franchise's Franchise Disclosure Document. No other form of business opportunity is required
to provide this level of pre-sale disclosure and it includes information on the franchisor including:
- Time in business
- Business experience
- Bankruptcies
- Litigation
- Costs
- Total Investment
- Franchise Fee
- Other Fees (Equipment, Supplies, Insurance, etc.)
- Working capital
- Royalties
- Franchise Agreement
Risk
A common mistake is to believe an existing business will mitigate your risk significantly. This can be true, but it’s not a given. Risk is mitigated by gaining a full understanding of the options and making a decision based on real data. Taking a “buyer beware” approach when looking at a business someone else built is a wise move. Assuming you’ll save time and money automatically is a bad idea and the opposite can be just as true.
You’re not in the market for a new refrigerator. Investing in yourself as a business owner is a life changing decision, one to tread through carefully. Seeking advice from industry experts with experience buying and selling existing businesses will go a long way to ensuring you make the right decision on the road to entrepreneurship.
For more than 30 years, Phil Kuban has enjoyed helping people realize their dream of business
ownership. His personal experience of being a franchisee of retail and professional services franchises, a franchisor and area developer has been instrumental
in the guidance he’s able to provide to his clients. Master franchise development is an area Phil is particularly passionate about and he’s been successful
in recognizing up-and-coming brands. He always suggests his clients begin with the end in mind because the right franchise opportunity with the right
exit strategy is the key.
To stay connected to a wealth of information on becoming your own boss, visit FranNet of Atlanta on the web and read some of our Atlanta area franchise success stories. Phil can be reached at pkuban@frannet.com.
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