Should You Buy a Business or Franchise?

For those who have the cash or convertible assets to buy a business instead of starting from scratch, there is another possible decision. Should you buy an existing business or buy into a franchise? There are pros and cons for each approach, as well as different questions to askⁱ.

When you buy an existing business that is not a franchise operation, you gain complete control of the business, a definite plus. You probably value a lot about the business, or you would not be buying it. However, you have control and make any changes you like. You may value the customer base and brand goodwill, and you may find the employees to be loyal and efficient, but you may want to make changes in vendors, marketing, and other management areas. You are free to do so.

Buying into a franchise is different in that you are ceding a good bit of your control over to the franchise, from logo and branding to operations and management methods and functions. Of course, one reason people value franchises is that they get the help they need in areas where they are weak. They get an established brand, effective marketing tools and materials, and some benefit from regional and possibly national advertising.

The Basic Considerations

The three basic things to consider when making the existing business versus franchise decision are:

How much do you have to invest? What can you comfortably invest in a business considering your personal financial situation? Many franchises carry a hefty price tag to get started and an ongoing franchise fee structure.
What expertise do you have in the business? You can be a smart person when it comes to finances, profit, and loss. But, if you do not have a clue where a muffler is on a car, you probably want to think twice about buying a standalone local car repair business. A muffler or auto repair franchise could be a better decision.
What is the infrastructure required? While a service business may not have heavy inventory requirements, an auto parts store is quite different. There are also different licensing, taxation, and cash flow considerations.

Those basic considerations should help you to decide about the best way to go, so now you just need to choose the right business for you.

Buying an Existing Business – Consider:

When buying an existing business, all the ownership and management decisions and tasks are yours to control, but also yours to know and understand.

Permits and licenses – Though the business has all the necessary licenses and permits, or they should, you probably must take action to transfer them to your ownership. You also want to know the process and deadlines for renewals. When it comes to some types of permits, it is a lot more complex. A liquor license normally requires background checks, and you want to make sure you know every qualification before you buy that liquor store.
Zoning laws – Learn the zoning requirements to be sure that you do not make changes that will be in violation.
Environmental regulations – Some business types are subject to local, regional, and federal environmental regulations. Convenience stores with gas pumps is an example. Underground tanks for gas are highly regulated.
Valuing the business for purchase – This can be challenging, as you do not want to take the asking price as the true value. There are several ways in which a tax professional or commercial property sales professional may value a business through analysis of their financial statements. You will want to consult with someone with experience in this area. Another quick approach to see if you and the seller are even in the same ballpark is to use a business valuation multiplier. It is a number that is an average of what like business types are worth compared to their annual earnings. So, taking the earnings of the company you are considering buying and using the right multiplier for that type of business, you multiply that number times the annual profit to get an estimate of value.

In any financial evaluation of a business, consulting with financial professionals is wise before making a substantial investment.

Buying into a Franchise – Consider:

When you get into a franchise, those items of consideration above are all taken care of in the operating processes and regulations of the franchise. The value to you is that they have already done all of this and can make sure that you stay on the right track. Also:

Understand the reports: These are not only reporting about the financials of the company and franchisees, but also the UFOC, Uniform Franchise Offer Circular. This reports the vital statistics of the franchise’s legal, financial, and personnel history.
Understand the franchise rules and regulations – A major value of a franchise is the standardized operations and procedures that are proved to be successful in growing the business. Those operating and management procedures will be spelled out in rules of the franchise, as they do not want failing locations.
Understand the contracts – There will be a lengthy contract or multiple contracts between you as an owner and the franchise. There will be things like sales quotas, management, inventory, and operating hours requirements.

Doing your due diligence in making the basic either/or decision and then understanding what to look for will help to make your new business a success.

i Buy an existing business or franchise, SBA website