Buying an existing franchise

by Kathryn Hawkins

Launching a business is a lot of work when you’re starting from scratch. You’ll need to put substantial time into researching your business model, branding, and marketing, with no guarantee of success—not to mention the fact that financing your business can be an ordeal in itself.

In contrast, buying an existing franchise means that you’re halfway there. Your franchisor will generally provide you with training, ongoing support, and the benefits of a recognizable brand name and proven business model. Even so, it’s important to choose carefully when selecting a franchise to purchase, or you’ll risk spending a significant sum of money on a bad investment. Consider these questions when weighing up whether to purchase a franchise.

How much will it cost me?
 

The franchisor will ask for a certain purchase price—but that’s just the beginning. In addition to the franchise fee, you’ll be responsible for paying ongoing expenses such as rent, staff salaries, and equipment fees. And it’s unrealistic to expect that you’ll break even, much less make a profit, in your first year of business, so you’ll probably need to rely on personal savings to pay for your own living expenses and the business’ bills until you begin making money. Weigh up how much money you have available, how much you’re willing to borrow, and what the risks are before writing out a check to a franchisor.

How successful is the franchisor? 


You’ll find thousands of businesses available to franchise in industries running the gamut from fast food to pet grooming. While some—McDonalds or Starbucks, for example—are household names around the world, others may have minimal recognition. For the most part, they’ll be priced accordingly: It will cost far more to purchase a McDonalds than to buy a frozen yogurt stand that has just two other franchises. 

However, you’ll have to take a deeper look to see if the pricing makes sense: Is the business on its way up, or have profits dropped recently? Does the business offer enough name recognition and other support to justify its asking price? Take a good look at the franchisor’s financial details, and consult with an accountant or other financial professional to get a better sense of how the business and its existing franchisees are performing.

How do other franchisees feel about the business? 

The best way to tell how a business’ franchisees are doing is to ask the owners directly. In some cases, they may not be willing to reveal much detail, but generally you should find that they’ll be open to telling you whether purchasing the franchise proved to be a good investment or not.

Will my location be a good fit? 

Just because a franchise performed well in one city, that’s no guarantee that it will achieve success in your own region. Carefully examine the business’ customer data and compare it to demographic details for the area where you plan on launching the franchise. Additionally, check out the franchisor’s local competition—a bit of rivalry can be healthy, but if a competitor already has strong market share in your area of choice, it may not be worth moving in.

How prepared am I to run this sort of business? 

Franchises are tempting options to many people because they seem like turnkey solutions. However, if you don’t have any experience in the industry, even the franchisor’s training and ongoing support aren’t likely to help you succeed in your new venture. Before jumping into a franchise purchase, consider how well your skills and past experience matches up to the demands of the new role. If you have minimal experience in the kitchen, but you’re considering opening a restaurant franchise, it may be time to rethink your plans before you get burned—both physically and financially.

is a freelance writer and editor based in Portland, Maine. She is a regular contributor to BNET.com and Intuit's Small Business blog, and is owner and editor of Gimundo.com, a website and daily newsletter dedicated to good news.
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