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Have you ever envied a friend who inherited a family business—full of history and ready-made customers? That friend seemed fortunate. The business was established and stable, but is it the windfall it appears? That depends on many factors. If you are considering buying an existing franchise, there are several pros and cons to consider.
The Good Stuff
A pre-existing franchise can be an excellent way to acquire a franchise. If all is well, there are excellent benefits to purchasing a pre-existing franchise.
- Easier financing. Even though you might need capital financing, it is easier to obtain when there is a history of how an existing business performed. There is no guarantee that you will have the same performance, but it is easier for lenders to feel confident about a franchise with prior revenue.
- Quicker opening. Unlike a new franchise site, the seller already built the franchise and has it running. For a home-based franchise, the process and operations are in place and ready to carry on.
- Existing customers bring faster revenue. An established customer base is a significant benefit for buyers of existing franchises. Most new franchisees have to build loyalty and revenue streams over time, but with pre-existing clients, revenue levels are higher sooner than they would be if you are starting from scratch.
- Market-tested brand. Franchises are attractive because they offer a brand that has worked before. When you buy an existing franchise, you get brand recognition along with a location and market that is already proven. If the local market has accepted and used the franchise already, a franchisee won’t worry as much about whether the site will be successful.
The Not-So-Good Stuff
Any business has potential risks, even a proven franchise. These may not preclude a purchase, but they are topics that you must investigate to reduce exposure and risk.
- Potentially high price. A successful, pre-owned business might cost significantly more than one you build yourself. It could come with quicker revenue streams, but it might not be the right financial mix for your situation. Consider how best to invest your money to create the best return for your franchising efforts.
- Potential hidden issues. Franchise resales involve the franchisor, too, and that helps guide and protect your purchase. However, it is important to understand if an existing owner has negative reasons for wanting to sell. Are profits low? Is there a poor reputation? Is the location fraught with crime? Or are employees hard to find? There is a reason that a franchise owner is selling. If you are lucky, he is retiring to Fiji with his higher purchase price created through a smoothly operating and highly successful franchise. If you are not careful, you will be the owner of a poorly run franchise, plagued with hidden challenges.
- Change management. Changes in organizations are difficult. Employees struggle with it, and customers may resist it, too. If you are a new business owner, it will be more difficult to get all the stakeholders working together in your best interest. Customers who are loyal to the previous owner might not support your arrival. Some turnover is to be expected, of course, so plan your market entrance with the franchisor to offset customer attrition.
Every purchase situation is different, of course. And pre-existing franchise sales are valid ways to enter into franchising. Evaluate the conditions, performance, and seller motivations carefully. With due diligence and good franchisor support, it is an excellent choice to consider a pre-existing franchise purchase.
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Anne Daniells is a co-owner of Enterprising Solutions, a professional services firm specializing in corporate communication and financial improvement for businesses where she shares decades of corporate and entrepreneurial experience—including franchise ownership—in her writings on business culture. She has authored hundreds of articles for publications including AllBusiness.com, TweakYourBiz.com, and MSN.com. Reach out via her website for more on where corporate culture, communication, and human architecture collide.