The franchise fee alone may be out of your reach, and if it isn’t, it will take up a severe chunk of your liquidity. 01. Cons of Franchise Ownership Franchises usually have more up front cost than starting your own independent business. Negotiating resales can be tricky, but if you’re aware of the potential issues and take action to protect yourself from them, you should be able to minimise risk. Cons: PROS AND CONS OF BUYING AN EXISTING FRANCHISE What’s better than buying a franchise? Are there new competitors coming into the market that could affect future performance. Having a brand name backing you allows you to benefit from the collective buying power of the franchise when it comes to purchasing inventory and equipment. Seeking financing is a common need for business owners regardless of whether they’re starting their own business or buying a franchise, and securing that financing is never easy. 01. For example, consider these franchise pros and cons: Pros: Established marketing materials such as ad campaigns, website, and reputation; Recognizable branding; Established customer base; Cons: Lack of autonomy Buying a franchise, however, requires you to hand over a substantial amount of money to the franchiser before you can have a business and call yourself a business owner. 1. These are some of the biggest pros and cons of buying a franchise. Also, when you start a new business you are faced with a lot of unknowns, whereas with … The former option enables you to step right in and take over a business that has an existing customer base, documented cash flows, and a workforce already in place. Potential cons of buying an existing business. The Pros of Buying an Existing Business. Buying a franchise can be a viable alternative to starting your own business, but it’s not for everybody. Importantly, you may pay more for an existing franchise because you will be … No matter how well run, efficient, and well-liked your franchise location is, your business is still tied to the national franchise—and any issues that brand runs into affects your business outcomes. Perhaps after reviewing the pros and cons of owning a business, you're thinking that you want to be self-employed but don't have an innovative idea or are not comfortable taking such a big risk. Decide if you can live with the cons—and take full advantage of the pros—before you buy a franchise. Weighing up the pros and cons. Some of the most difficult parts of starting a business revolve around putting stakes in the ground for your brand, your business model, and even your culture. In the case of the UPS Store the royalties (comprised of both the standard 8.5% fee and another 2.5% for ad royalties) add up to 11% of your revenue. With a resale, you can sometimes negotiate the price, payment terms, training from the seller, and every other aspect of the deal. If you decide to buy a non-franchised, independent business, you get to make all the decisions. The most difficult part of owning a business arguably comes in the startup stage, where you have to write a business plan, conduct market research, create a minimum viable product, test that product, and then scale (if testing goes well, that is). However, buying a new franchise does not guarantee success. Trends for the location – have they been continually strong, or have they been on the decline? There will be an existing strong brand value and business concept that you can work with. Because the SBA reserves a portion of their loan allotment specifically for franchises, however, you may have an easier time of qualifying than if you were to seek an SBA microloan for starting up an independent business of your own. Buying a franchise offers the opportunity to network with other entrepreneurs creating an opportunity to share experiences. Are the neighborhood and its demographics beginning to change? You might be able to purchase an existing restaurant, but what happens if you have no restaurant experience as an entrepreneur? If you have a creative business mind, you can start any type of business on a small scale and, with patience and hard work, grow it to the scale you desire. Also, when you start a new business you are faced with a lot of unknowns, whereas with … Franchising Pros. In this case, you clearly need a mechanism to extract yourself from the deal if, for any reason, you are not approved. When you agree to buy a franchise, you’ll no doubt sign a contract such as a Franchise Disclosure Agreement, which lists all the things you can and cannot do as a franchisee. Why is the franchise leaving the business? Not all franchise companies advertise the locations that may be for sale. When you buy an existing franchise, you don’t need to spend 2-3 years building your business. Will the existing staff, especially the managers, be staying? Many prospective and current franchisees face this question when considering their next investment, is it better to buy an existing business or start with a new franchise? If you choose to buy a franchise hotel from an existing owner, be sure to inquire about the existing agreement. Is a Franchise the Right Business for You? When you buy a franchise you are gaining years of experience spent by the franchisor building their brand and systems. In theory, the franchise concept is a brilliant business model. You may be also be required to complete a time-consuming and costly orientation before the franchisor gives you their final approval as a franchise. This is mainly because you get a chance to be your own boss from the start and don’t need to start a business from scratch. 9 Pros and Cons of Franchising By Shreya February 14, 2020 ‘Franchise’ can be defined as a right to sell a company’s products in particular areas using the company’s name. But in this blog, we’ll do our best to cover what are the benefits of buying a franchise. When buying a business, learn the key differences between buying an independent business vs buying franchise vs buying an existing franchise. You inherit trained employees If your franchise needs employees to operate it, you’ll also inherit a workforce. Pros of Buying a Franchise. Buying an independent business: You are boss of it all. Buying a franchise helps you skip this section: The system has already been tested and proven to work. If you are ready to operate your business under strict requirements and feel lack of control, then perhaps franchising will suit your needs. The franchisee's financials will tell you quite a bit, but in addition to the normal issues you want to look at in conducting due diligence for a new franchise, you should find out: Once you have identified an opportunity, look at the location as if you were starting fresh. These are the pros and cons of buying a franchise, according to Lex Baker, franchise management and development director for Wall Street English . Pro: An existing franchise has financial documents based on actual performance and a reputation within the community, the franchisor, and among other franchisees. A lot of people think that franchising is an easy and low budget way to become your own boss. For one thing, franchisees have to abide by company rules and the terms of their licensing agreements, so if you love to be independent, opening a franchise might not be your best bet. No need to start from scratch. If you are buying an existing Franchise then local brand engagement and reputation has already been created by the previous Franchise owners. One obvious advantage that big businesses have over small businesses is their access to increased buying power. Could it be investing in an existing franchise for sale instead? Though buying a franchise has its advantages for the small business owner, it doesn't come without disadvantages. . The Pros and Cons of Buying an Existing Franchise, Buying a Home-Based Franchise: Pros, Cons, and Checklist. Marketing Support. The former option enables you to step right in and take over a business that has an existing customer base, documented cash flows, and a workforce already in place. Your experience is limited. By far, the biggest advantage of buying into an established franchise is the strength of the brand and loyalty of its customers. Benefit from the Goodwill of the Existing Business. Add the One-Time Franchise Fee to Startup Costs. But just because the purchase price is going to be lower than the cost of starting a new franchise, does not mean the franchise is a good investment. 02. Pros of Buying a Franchise For example, listed under “Pro’s” for reasons to buy a franchise you might see these statements: The franchise system includes guidelines so you can operate the business using the franchise standards. You’ll Significantly Reduce Startup Time; 3. Pros of Franchise Businesses. It might sound 'fun' to skip the startup and buy an existing business. Running your own franchise is still hard work, and there are drawbacks to opening a business that requires operating by someone else’s rules. The decision to buy into a franchise comes with many of the same considerations as starting any other business—you’ll need a passion for the business, a business plan, a team, tools that help you stay organized, financing, and much more. You’ll Get What You Paid For; 2. Independent small business owners often have very little support or lack a support team with business acumen. It prohibits entrepreneurial freedom. Perhaps one of … The franchise agreement that you may be required to sign may be different from the sellers. In some cases, it gives the business owners the right to use the franchisor’s already tested business products and their established name and brand. Then there are royalty fees and other startup expenses. Franchising Pros Franchising Cons; Franchises have the support of big corporations with a business model that has already been proven effective: Predetermined branding limits creative opportunities to alter or make additions to the franchise: Franchise business loans are easier to get than loans to start an independent business Pros and Cons of Buying a Franchise. But although it's a new business, you also need to find out the terms of the agreement your franchisor is going to be willing to grant you. Pros. 4. Break one of those many requirements and you could lose your business altogether. It’s now up to you to apply their system to your market. Could it be investing in an existing franchise for sale instead? It’s often better to gain the experience needed before purchasing a business so you don’t have to fly by the seat of your … Here are some of the pros and cons of buying an existing Franchise. When you buy into a franchise, the hard work is already done for you. Cons. Although franchise fees are nonrefundable, the skills you will learn in marketing, management, upkeep, and so on within the context of a franchise are invaluable and can be transferred to new business opportunities down the line. This will enable you to achieve the turnover of an established business rather than that of a start-up. Buying an existing franchise is one of those particularly shiny objects and attractive possibilities. The business is already up and running, so you may be able to start doing business immediately, with vendors, customers, trained employees, and cash flow on day one. If not, you can go through the entire negotiation only to learn someone else is going to buy the business. When buying a business, learn the key differences between buying an independent business vs buying franchise vs buying an existing franchise. If you’re exploring the idea of buying a franchise, you should know what you’re getting yourself into. Established Systems What's Required to Open a McDonald's Franchise? When you buy an existing franchise, you don’t need to spend 2-3 years building your business. Although you as a franchisee may be required to invest a certain amount of time and resources in marketing and advertising (more on that next), the franchises themselves will promote your business via nationwide campaigns that are broadcast on TV, radio, and online. An existing franchise has a history. Some may “only” be tens of thousands of dollars, but even that is a sizeable investment for most people. Understanding the cost of upgrading the location, the time you have to make the improvements, and whether or not you will need to close the location during the remodeling is essential for you to know in advance. You need to consider the pros and cons of buying a franchise business to make your final deliberate decision. In fact, the mythical “statistic” that says that franchises are less likely to fail than other businesses is just that—a myth. The Pros and Cons of Buying a New Franchise: Starting a franchise unit involves investing a lot of money, sometimes hundreds of thousands of pounds, so it’s vital you make the right choice. There is an obvious appeal to starting a business by buying a franchise. Surely this practice has its own pitfalls. 1. For example, many franchises require you to make an initial investment that can be $20,000 or more. Any of you willing to discuss + share the pros and cons of buying an existing small business? If you are keen to buy an existing business, you probably want to buy the good reputation that the business holds. Buying a brand name franchise is often beyond the financial capability of many potential business owners. If you’re thinking about buying an existing franchise, here are three pros and three cons to consider. The Pros of Elderly Care Franchises Available for Resale Existing Cash Flow & Assets. With an existing franchise, you have the opportunity to review the seller’s books and records and make a determination of future … When starting a business, should you consider franchising? One of the hardest parts of starting a new business is getting your name out there and developing your brand. Whereas starting a business often comes with a lot of unknowns, a franchise is proof of a successful model already in motion. Getting customers to recognize your brand is an incredibly difficult slog—but a franchise has a name that is recognized nationwide. Check to see if the franchise you’re interested in buying appears in the, EY & Citi On The Importance Of Resilience And Innovation, Impact 50: Investors Seeking Profit — And Pushing For Change, Diverse Teams Help Leaders Evolve, Especially In Troubled Times, 4 Hot SaaS Startups That Are Paving The Way For Effective Remote Teams. Benefit from the Goodwill of the Existing Business. Buying a franchise helps you skip this section: The system has already been tested and proven to work. If you’re thinking about buying an existing franchise, here are three pros and three cons to consider. Most franchisors won't require you to pay a new franchise fee, but many will still charge a transfer fee that either you or the selling franchisee will need to pay. 2. The Product or Service is Already Market Tested; 2. Training staff will be a supported process as the systems will be in placed. No business or business model is perfect, so it’s important to know what you’ll have to deal with if you do move ahead on buying one: Business owners love being their own boss, but for owners of a franchise location, that’s simply not the case. Pros 1 Established brand. Here’s a rundown of the pros and cons of buying a franchise: You may already have a franchise in mind—a certain type of business that is lacking in your neighborhood, or a company that you admire and want to be a part of by becoming a franchisee. 1. The Cons of Franchise Ownership 1. You’ll have input and help from the franchise on how to craft and execute effective campaigns of your own as well. Buying a franchise comes with its own set of issues and drawbacks. Access to the Business’s Customer Base; The Cons of Buying an Existing Small Business. Ready Customer Base. The routes one can take to become a business owner are quite uncomplicated. And if the franchisor requires you to bring the location up to then-current standards, you need to understand your additional capital requirements. Franchising Pros Franchising Cons; Franchises have the support of big corporations with a business model that has already been proven effective: Predetermined branding limits creative opportunities to alter or make additions to the franchise: Franchise business loans are easier to get than loans to start an independent business But This Alexandria Baker Wasn’t About To Let Her Employees Down. As with any investment, there are both pros and cons. © 2021 Forbes Media LLC. Don't assume that you are going to be able to assume the existing agreement that the seller has, and don't assume that assuming an existing agreement is even going to be beneficial for you. In addition to having the franchisor to rely on, buying a franchise also gives you access to … In addition to the high costs of entering the franchise space, you’ll also continue to owe your franchise royalty payments for using their name and system, and will have to contribute to marketing and advertising costs at their discretion. What Are The Pros And Cons of Buying An Existing Business? Research the company as much as possible prior to making an offer. Cons of Franchise Ownership Franchises usually have more up front cost than starting your own independent business. The Brand Is Established; 4. What are the pros (or cons) of going into a franchise vs. starting my own business that I should be aware of? When starting a business, should you consider franchising? It is far easier to investigate a known entity than a start-up. Established Brand and Customer Base. However, you still need to do your research to find out if the Franchise brand has a good reputation in your local area. Knowing the pros and cons of each type of business will help you buy the best type of business that's right for you. The franchise may buy large amounts of inventory and equipment on behalf of their franchisees, meaning you’ll obtain these important assets at a reduced cost. Buying an Existing Business. I currently serve on the Advisory Board of the Columbia University Entrepreneurship Organization and am an investor and advisor to startups such as Codecademy, SmartThings and TransferWise. You’ll get help bringing new hires up to speed on how things operate—often with on-site training on opening procedures, daily operations, using point-of-sale software, and more. Even though financing is a possibility, it’s not a guarantee, and that’s often an issue for prospective franchisees. If a scandal rocks the national office, or another franchisee gets bad publicity, your business can be affected. Many prospective and current franchisees face this question when considering their next investment, is it better to buy an existing business or start with a new franchise? Opinions expressed by Forbes Contributors are their own. You will also avoid all the issues of choosing a location, building out a site, and reviewing demographic studies - it's not uncommon for a new franchisee to wait a year or more until their location is ready to start doing business. For example, listed under “Pro’s” for reasons to buy a franchise you might see these statements: The franchise system includes guidelines so you can operate the business using the franchise standards. Track record—Buying a business gives you an established customer base, team, business plan and operation. 3. The Pros and Cons of Buying a Business When to start your own business, and when to acquire one instead. What Are Franchise Relationship Structures? I'm the CEO of Fundera, an online marketplace for small business loans. Franchises often have the support of a national campaign, as well as prepared marketing materials for a local campaign. The advantages of buying a franchise resale are many and varied. However, not every franchise is a success, so let’s take a look at the pros and cons of buying a franchise business. If you conduct your research discreetly, they will provide you with insight about the specific business and the franchisor that you may never be able to determine on your own. Plus there are ongoing royalties that have to be paid to the franchisor. While many prospective franchisees are attracted by the comparatively low start-up costs associated with starting a franchised business from scratch and want the challenge of building something from nothing, others want to step into a business that’s already generating a profit from an existing customer base. If the business has been on a decline for the past several months or years, don't assume that you will work any harder or smarter than the seller. I write about small business lending, finance, and entrepreneurship. If you’ve identified a more efficient way to conduct business, that may not matter if the company doesn’t agree with you—and you won’t have any recourse, either. Before buying franchise businesses or owning franchise businesses, read our pros and cons of becoming a franchisee. But before you jump at the next opportunity that presents itself, consider the pros and cons. Finally, you can speak with other franchisees in the system. Buying an existing cafe allows you to inherit a host of possibilities. On 18.05.2020 By Chloe Smith In Business. Franchises come preloaded with a name that people know and trust. 1. A proven system. An existing franchise has a history. Most would-be entrepreneurs consider buying a franchise as an interesting business opportunity. As with any investment, there are both pros and cons. By Farmers Insurance @WeAreFarmers. Established Cash Flow. That’s a valuable value add. Prospective buyers should weigh the pros and cons of franchise options, because it’s not always a clear-cut choice. 1. It is, for the most part, a concept that has proven effective in some areas under certain conditions. When you step into an already functional cafe Existing cash flow, established processes for staff and systems for suppliers, existing menu, you can step in and earn money from day one, there is … Buying a Franchise is a good way to get into the restaurant industry, especially if - 1. This is mainly because you get a chance to be your own boss from the start and don’t need to start a business from scratch. The Pandemic Took Sales To Zero. The franchisor generally has the right of first refusal to buy any individual franchises within their system. Brand Reputation . You will analyse the profitability of the business, meaning that you will have a good general understanding of the business’ likelihood of success. New franchises come with a set price and terms, on which the franchisor is rarely flexible. Then you could consider buying an already existing business or investing in a franchise. Prior to Fundera, I co-founded GroupMe, a group messaging service that was acquired by Skype in August 2011, and subsequently acquired by Microsoft in October 2011. The most difficult part of owning a business arguably comes in the startup stage, where you have to. The biggest barrier to buying a franchise is, of course, the price tag: The exact costs vary depending on the franchise, but. For customers, there is no doubt what you’ll get when you walk into a Wendy’s or Barry’s Bootcamp. In some cases, it gives the business owners the right to use the franchisor’s already tested business products and their established name and brand. Pros of buying a business. Though you’ll have some autonomy in how the business operates, for the most part you’ll be required to follow the rules, regulations, system operations, and directives of the franchise. Pro: You can skip the startup stage One of the biggest benefits of purchasing a franchise is avoiding the most difficult steps of starting a business. Ready Customer Base. All Rights Reserved, This is a BETA experience. As mentioned above, the costs of buying into a franchise are high—in some cases, markedly higher than they would be if you started your own business. Commentary by … Instead of guessing whether your new business will be successful, you can analyze actual historical financial data to determine whether or not it is a good business. Given the generally dismal failure of start-up businesses, there is another option if you wish to buy a franchise: buy an existing franchise. , conduct market research, create a minimum viable product, test that product, and then scale (if testing goes well, that is). Opening a franchise can be a lower-risk way to start a small business, but it’s not for everyone. Running your own franchise is still hard work, and there are drawbacks to opening a business that requires operating by someone else’s rules. That doesn’t mean that buying a franchise equals instant and sustained success. Pro: You can skip the startup stage One of the biggest benefits of purchasing a franchise is avoiding the most difficult steps of starting a business. But the specifics of what makes franchising a good and bad move is what makes your choice that much more intriguing. With an existing franchise, you have the opportunity to review the seller’s books and records and make a determination of future performance based on real numbers in an operating location. Buy into a Franchise Pros: There is a proven system you will be buying into when you buy into a franchise and there will be support for you from the frnchisor. These are all great sources of information to help you evaluate the business and business owner, and none of these is available when buying a new franchise. Instead of guessing whether your new business will be successful, you can analyze actual historical financial data to determine whether or not it is a good business. 02. Buying a Franchise Business – The Pros. One can either start a business from scratch, buy an existing business or become a franchisee. Purchasing an established business offers many of the same benefits as a franchise, but allows you to have complete control over the future of the company. A lot of people think that franchising is an easy and low budget way to become your own boss. Avec une franchise existante, vous pouvez négocier le prix d'achat. As with any case, there are pros and cons to each option. Then there are royalty fees and other startup expenses. Avec une franchise existante, vous avez la possibilité d'examiner les livres et les registres du vendeur et de déterminer la performance future en fonction des chiffres réels dans un lieu d'exploitation. 1. Add the One-Time Franchise Fee to Startup Costs. However, just as with any investment, you need to do your homework, and you need to have qualified legal and business advisors working with you. Significant Changes May Be Necessary Photo by Tim Mossholder on Unsplash. SBA loans, in particular, are considered the gold standard in business loans, but they require meeting stringent eligibility requirements. Access to the Business’s Customer Base; The Cons of Buying an Existing Small Business. Having the … The franchisor will likely want to see how much you are paying for the business and how you plan on financing your purchase: there is little advantage to any franchisor if you overpay for the business and then can’t service your debt and fail. There’s no room for you to experiment with various ideas since the franchise has strict rules that you should adhere to, which can stifle your creativity and make you feel suffocated. Some may “ only ” be tens of thousands of dollars, and those changes be! A McDonald 's franchise success than starting your own business, you probably want to buy the good reputation the. Very little support or lack a support team with business acumen and train new members staff! May be Necessary buying a franchise won ’ t need to have industry experience to successful. People think that franchising is an experienced entrepreneur who has trained individuals to become your own,! 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