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What You Should Know Before Buying a Franchise

Buying a franchise offers you an opportunity to purchase a proven business model and name, and establish it in your local market. However, buying a franchise has its pros and cons, and its important to be familiar with each before making the decision to purchase a name brand business.

Benefits of Buying a Franchise Business:

  • Operating within an existing and proven corporate framework
  • The brand and operating procedures are already established
  • Existing customer base to tap into
  • Lower failure rate than other types of new businesses
  • Marketing plans and materials provided directly from the franchise’s corporate headquarters
  • Training from the corporate headquarters

Downsides to Buying a Franchise:

  • You’ll have to contribute a significant amount of capital upfront
  • Franchisors often have capital and net worth requirements
  • There is often a limit to flexibility within the business, and certain guidelines you must adhere to
  • Continued payment of franchise fees
  • Potential for conflict with the franchisor
  • Lack of financial privacy

What About Buying an Existing Franchise?

Opening a new franchise allows you to build something that’s all your own, and may be cheaper, considering you only have to pay an initial franchise fee. On the other hand, buying an existing franchise could be a more lucrative business venture – with access to its current and historical performance figures – and eliminates any headaches associated with starting from scratch.

A Few Things to Consider When Purchasing an Existing Franchise:

  • Review the Franchise Disclosure Document (FDD), which is the legal contract between the franchisor and franchisee. This generally includes information on fees, branding, advertising, training, quality control and more.
  • Review transfer requirements, when transferring business to new owner. Should be included in the FDD.
  • Hire a business broker to review the price of the business, to make sure it is fairly priced.
  • Review the financials closely, and ask appropriate questions.
  • Find out why the franchisee is selling their business. Some reasons like divorce or retirement are understandable, and no reason for concern, while other reasons like a downswing in the industry or failing franchise are clearly much more of a red flag, and to perhaps look elsewhere. Do your investigation.
  • Take some time to get to know the staff members and what they do. Determine who will stay when you take over.

To Franchise or Not to Franchise

Starting a franchise from scratch, or purchasing an existing one, makes business sense for many reasons. Whichever path you choose, make sure you research on which would be the right franchise for you, in the right location and consider the many different financing options available when purchasing a franchise.

Hiring a business broker and franchise attorney to represent your interests is always a good suggestion as well. If looking for help evaluating the pricing on a business, or moving forward on the purchase, contact us here at Capital Business Solutions for more help.

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