IBA is one of a few professional service firms in the United States serving the entrepreneurial community that has experienced, knowledgeable, highly skilled brokers specializing in Mergers & Acquisitions, Business Brokerage, and Franchise Brokerage with the ability to also sell commercial real estate. One of the questions we frequently receive from people interested in transitioning from corporate jobs to being their own bosses as business owners is, “Should I purchase an established business or franchise as a first time entrepreneur?”.
The reason that IBA has both business and franchise brokerage divisions is that the answer to the question depends on a spectrum of variables, and it is our firm’s goal not to hard sell a party on one option, but to provide comprehensive information about a menu of business acquisition ideas and let the buyer make a decision based on what best fits their experience, goals, and budget.
The first consideration for most entrepreneurs in selecting a business or franchise to acquire is the industry. At a given time, the selection of established businesses available for purchase in a specific industry is typically sparse, ranging from none to a handful of opportunities in the marketplace. Monthly IBA is approached by numerous buyers looking for specific industry acquisition opportunities in manufacturing, technology, transportation, hospitality, and many other industries (Industries Served – IBA Business Brokers (ibainc.com) ). We are blessed based on our regional scale, brokerage size, and reputation for excellence to consistently have more product for sale than any other firm in the region. Unfortunately, despite there being many quality, qualified buyers, IBA cannot order inventory to address this demand and many sales opportunities go unfulfilled. The best we can do is share information on the companies currently represented for sale by IBA (We do not sell other firms’ product because we have no guarantee of its quality or whether it was priced correctly.) and offer the ability to participate in our Buyer Database Program (Buy a Business – IBA Business Brokers – Fair Market Value (ibainc.com)), so the buyer will receive information on our new listings before they are advertised in the public domain (20 – 25% of IBA’s listings annually sell to participants in our Buyer Database Program).
One of the motivations IBA had for adding a franchise brokerage division many years ago was that it generated a long menu of offerings from virtually every industry that could be sold to entrepreneurs. Yes, the business would be a green field startup, but it would be a new business with a time tested, successful business model with a strong support network of experienced, knowledgeable personnel behind it. Why create a wheel from raw materials, when you can buy one tuned for high revolutions and traction? The probability for success with a franchised business model is significantly greater than for a new business startup originating from an idea that started at a kitchen table or in a garage workshop.
The second element impacting most corporate employee to entrepreneur purchase decisions is the location of the business. Similar to industry, it is a constantly changing grab bag of where the companies offered for sale in the marketplace will be geographically located at a given place & time. There is a probability that IBA will always have businesses for sale in the Seattle, Portland, and Spokane metropolitan areas, however the more specialized the location desired the less the likelihood that a business will be on the market in that area. Again, the advantage of being in our Buyer Database Program is that if you are looking for an acquisition opportunity in Bend, Oregon; Seaside, Oregon; Walla Walla, Washington; or Bellingham, Washington, you will be proactively notified the next time a business in that area is listed by IBA for sale. In IBA’s nearly 50-year history of serving the Pacific Northwest, we have successfully sold businesses on the Pacific Ocean from Anchorage, Alaska to Point Roberts, Washington to North Bend, Oregon, and from the Canadian border to Arizona West of the Rocky Mountains. However, please recognize that it can be a long waiting period to find a business in a desired industry in a sought after location.
Similar to being able to find a business in almost every industry as a franchise, it is generally possible to place a desired franchise or franchised business model in a specific location. The only limitation being that many of the best franchises have their territories sell out in coveted areas. IBA’s franchise brokers spend significant time researching the up-and-coming opportunities in the franchise world. They are happy to share information on which franchises are growing or offer unique opportunities as a complimentary service to “want to be” entrepreneurs as assistance in making the best possible decision.
A common limiting consideration when buying a business is budget and signature power. IBA has a long line of buyers interested in the companies we represent for sale with EBITDA’s of $2 million or more. We have a hard time keeping this product on our shelves and frequently have multiple buyer offer situations for our clients to evaluate when selling them. These companies commonly sell for upper seven and eight figures. Unfortunately, although possessing the relevant knowledge & experience to run them successfully, many buyers leaving the corporate world do not have the money to buy or successfully compete with private equity firms and corporate merger buyers for these businesses. As a general rule, supported by a SBA loan or commercial financing a buyer will need to be able to inject 10 – 25% of the purchase price into a deal in cash to successfully complete a transaction. Deals sometimes can get done with less money, but buyer expectations should be in this range.
One advantage of buying a franchise is the investment level necessary to own the business is generally less than buying an established business. A good analogy to explain this situation is an established business is a home that was built ten years ago with a view. The price of that property can be accurately determined by an experienced real estate broker with the CRS (https://crs.com/) credential. Comparatively, a franchise is residential zoned real estate with utility infrastructure and a view. A quality residence can be built on that property, but the size and style of the house are unknown until it is completed. It could be a doublewide mobile home or an estate worthy of a feature in Architectural Digest (Architectural Digest Homepage | Architectural Digest).
The final consideration an entrepreneur should evaluate in deciding whether to purchase an established business or a franchise is whether they want to manage a business with a financial track record and infrastructure or build sales, profit, and staff from the foundation up. A party purchasing a successful company in a retirement sale will be able to review historical financial information for that specific entity, acquire furniture, fixtures, & equipment in lot pricing, have customers who are visiting, communicating, and placing orders from day one, and a trained, experienced team of employees. For an executive, the owner’s responsibilities will likely be very similar to what they knew previously managing budgets and people in the corporate world.
Conversely, when buying a franchise nothing will be in place other than a business model, training, and support infrastructure. A location will need to be located; furniture, fixtures, & equipment purchased, staff hired, and the road to profitability traveled financially. A useful tool for creating a business plan as a new franchise owner is The Franchise Disclosure Document (FDD). This mandatory disclosure document by the Federal Trade Commission (FTC) for every franchisor must be provided to potential franchisees before completing a franchise sale (http://franchise.law/franchise-disclosure-document/). IBA recommends that all potential franchise buyers specifically review Item 19 (Financial Performance Representation) and Item 21 (Financial Documents) before making a financial commitment to a franchisor. Item 19 is the section of the FDD where a franchisor shares information on the performance of other franchisees in their network. It is not a requirement that a franchisor share this information, but any prudent buyer should demand the right to review financials from other locations and talk with other franchisees before making a purchase decision. Item 21 is the section where the franchisor shares their own financial health & strength. IBA has been asked to sell franchises in the past where the franchisor was in financial trouble. This commonly results in a diminished sale value for individual franchises due to issues outside of the entrepreneur’s sphere of influence. It is as important for a franchise buyer to vet the franchisor as the franchisor to vet a potential franchisee. Caveat Emptor, “Let the Buyer Beware”, who does not. Caveat Emptor (Buyer Beware): What It Is, and What Replaced It (investopedia.com)
There are many roads to entrepreneurial success. People have become millionaires who had an idea and executed successfully. IBA has successfully sold 100’s of businesses of that variety. However, for a first-time entrepreneur risk is mitigated if an established business or franchise is purchased. If entrepreneurship is something that intrigues you, the members of the IBA working out of our offices in Bellevue, Portland, Spokane, and Bend would welcome the opportunity to be a resource. All conversations with IBA are held in strict confidence.
IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media, business brokerage, mergers & acquisitions, real estate, legal, and accounting communities on subjects relevant to the purchase & sale of privately held companies and family-owned businesses. IBA is recognized as one of the best business brokerage firms in the nation based on its long track record of successfully negotiating “win-win” business sale transactions in environments of full disclosure employing “best practices”.