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The Pros and Cons of Buying an Existing Franchise

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Written by Guest Author: Richard Parker

In theory, the franchise concept is a brilliant business model. However, buying a new franchise does not guarantee success. It is, for the most part, a concept that has proven effective in some areas under certain conditions. Given the dismal failure of start-up businesses, there is another option if you wish to buy a franchise: buy a resale that is already successful.

The Pros

The business is already up and running; you can start doing business immediately. You will have a business with customers, employees and cash flow on day one. Plus, you will avoid all the issues of choosing a location, having to build out a site, and reviewing demographic studies. It is not uncommon for a new franchisee to wait a year or more until their location is ready to start doing business.

The business has a history. 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.

You can negotiate the price. New franchises come with a set price and terms. The franchisor is rarely flexible. With a resale, you can negotiate the price, payment terms, training from the seller, and every other aspect of the deal.

It is far easier to investigate a known entity than a start-up. Since you will have access to the company's books and records, contracts and customer files, you will know what the past has been, and that is the most viable way to get a glimpse into the future.

Finally, you can speak with other franchisees in the system. 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.

The Cons

Not all franchise companies advertise the locations that may be for sale. As such, your search may take a bit longer than what you would normally experience in a non-franchise business search.

The franchisor generally has the right of first refusal to buy any individual franchises within their system. You will want to get confirmation from the franchisor whether they intend to do so. If not, you can go through the entire negotiation only to learn someone else is going to buy the business.

Obtaining third-party financing may be more difficult because the better franchisors have relationships in place with some lenders to help to finance their new sales.

You may be required to complete a time-consuming and costly orientation before the franchisor gives you their final approval as a franchisee. In this case, you clearly need a mechanism to extract yourself from the deal if, for any reason, you are not approved.

Summary

Overall, the negatives are quite minor, certainly when compared to the positives of buying an existing franchise rather than a new one. By doing so, you can marry the best that a franchise and an existing business, rather than a start-up, has to offer.

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