IBA, as the premier business brokerage firm in the Pacific Northwest, is firmly established as a respected professional service firm in the legal, accounting, banking, mergers & acquisitions, real estate, and financial planning communities. Periodically, we will post guest blogs from professionals with knowledge to share for the good of owners of privately held companies & family owned businesses. The following blog article has been provided by Nate Riordan of West Coast Franchise Law (www.westcoastfranchiselaw.com):
The Pros and Cons of Buying an Existing Franchise
Thousands of entrepreneurs have discovered over the years that buying a franchise can be an incredibly profitable venture, but there are countless details to review upfront. After determining the industry and brand they want to work with, each franchisee must face a new question: Should they start a new franchise business or buy an existing one? Both have perks and drawbacks, and it’s crucial to understand them before deciding.
The benefits of buying an existing franchise are many. The time between purchasing the business and generating profits is usually shorter since the franchise is already up and running with fixtures, vendors, and employees. There may also be more flexibility regarding the purchase price. While franchise fees paid directly to the franchisor are usually inflexible, a motivated seller will negotiate.
With an existing franchise, much of your market research has already been done for you. The business’s past sales and financial records will provide a great deal of information regarding profitability. But unfortunately, past success doesn’t always translate into future solid sales.
Before purchasing a franchise, one must understand why the previous franchisee is selling. Of course, they may not always be upfront about this information. So, research on sales trends, overhead costs, new local developments, and changing demographics is crucial. A business can look great on paper but be overrun with problems.
Any potential buyer should also know that franchisors get a say in the process. Some have a right of first refusal to buy a business in their system, and franchisors can sometimes change their minds after you’ve already invested time, effort, and money. Further, just as with a new franchise, the franchisor can decide they’d rather not work with you for any reason.
Also remember the franchise agreement for a new owner may differ from the old one, and the franchisor will want to review your financing upfront. A plus is that you typically won’t need to pay a new franchise fee for an existing business, but the franchise likely will charge transfer and training fees.
In other words, buying an existing franchise is no shortcut. While it can be a great move, it requires just as much due diligence as setting up a new franchise location. Before moving forward, ensure you understand the business’s financials, the reason for the sale, and any transfer requirements. Otherwise, your careful purchase could quickly become a bad investment.
If you have questions relating to the content of this article or any legal issues related to owning or operating a franchised business model, Nate Riordan would welcome the opportunity to answer them. Mr. Riordan can be reached at (206) 703-2141 or nate@westcoastlaw.com.
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, accounting, legal, and financial planning 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”.