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Should You Buy An Existing Business Or Buy (And Start Up) A Franchise? The Pros And Cons.

openforbusiness-2392143_sWho doesn’t want to own their own successful business? In our world, we meet a lot of people that do. And, if they are serious about acquiring a business, they are faced with several options. Which option to choose can be a daunting task and finding the proper answer takes research and reflection. Many of our clients are exploring two options, purchasing an existing business or purchasing a franchise. Frankly, there are pros and cons to both scenarios. And, like so many things, part of the answer to the question, “which is the right option for me” is… “It depends.”

The consensus may be that purchasing a resale is a safer bet. And there certainly are advantages to doing so.

–       Many of the difficult tasks associated with start-up are already handled.

–       The business has built good will – existing customers and a good reputation.

–       Existing cash flow may offer the new owner an immediate income and a bit of a financial cushion.

–       Financials and tax returns may be available to verify past performance.

–       Financing may be readily available from the owner or a financial institution, based on the existing cash flow.

–       Capable employees may be in place to help advance your learning curve and make the transition easier.

–       The existing location may be a good one, well established and with good leasing terms.

Of course, there are certain disadvantages as well:

–       Cash flow may not be as advertised. Seek professional advice and make sure it is.

–       Employees may be tied to the owner and will not react favorably to a new owner.

–       Good will may be about to change to bad will, say with the pending loss of a large customer, and the owner is not anxious to share this information.

–       There may be no sustainable operating system that allows for a smooth operation without the owner’s involvement

–       The location may be a bad one and a lease transfer may be difficult.

–       The business may just be a bad fit for the prospective new owner’s skill set and capabilities.

Buying and building a new franchise may come with a perceived higher risk but may offer potentially higher rewards and some significant advantages:

–       A new owner gets to start with a clean slate and stamp his/her personality on to the business operation.

–       The owner can buy the business that fits his/her skill set and professional and personal goals and objectives. There are many choices.

–       The franchise is providing a proven blueprint and a sustainable system for building and running the business.

–       If the brand name is already a strong one, you will benefit by having some customer base before you even start the business.

–       It is usually much less expensive, even when taking into account the need for start-up working capital, since you are not paying for existing cash flow.

–       You can hire and train the employees you want.

–       The business comes with updated technology and operating/marketing plans.

–       Franchisors provide a great deal of disclosure through your due diligence process that may include a look at the earnings of existing franchise owners.

Like all endeavors, buying a franchise has its disadvantages as well:

–       There are fewer industry options from which to choose. Sure, there are over 3000 franchises in the US, but if you want to own a specialty chemical business or start a horse training business, there are no franchises that do that.

–       Many (not all) franchises utilize a structured operating system that some business owners may find stifling.

–       May be more difficult to get financing without existing cash flow.

In our experience, finding the business that fits your personal and professional goals and skill set is very important and critical to the success of any business venture. A business is a vehicle to take you to where you want to go several years down the road. You need to be able to see yourself in it and be confident that it has the financial upside necessary to your success. Oftentimes, buying an existing business simply because it can provide some immediate cash flow may be a recipe for disaster if you do not have the required skill set or determination to run the business.

Our clients overwhelmingly choose to buy a franchise because, with so many options available, they can get exactly what they want…a business that “fits them.” But, there are also good existing businesses out there for sale.

Which option is right for you? Well… it depends… doesn’t it?

Mike Hall is the owner of FranNet Carolina, a franchise consulting company that matches clients to business opportunities.

Mike Hall

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