Buying a franchise?

With so many options available, the question becomes which structure of business-ownership should you pursue? There are numerous choices ranging from existing businesses, start-ups, home-based businesses, multi-level marketing businesses (MLMs) and franchised businesses across a range of industries to choose from.  When reviewing all of the possibilities, you have to decide what will work best for you.  Most consultants would advise that your chances of success are clearly best when you buy a successful existing business or a franchised business.   

Buying a franchise could be a smart option – it is a method of being in business for yourself, but not by yourself.  You’ve got instant name recognition, business systems from day one, a potentially low failure rate, and guidelines and advice from your franchisor to deal with the problems you may face.  Those with little experience or buying their first business may find buying a franchise the best option, but it is highly recommended that you research the brand and the franchisor well before doing so.

An existing business or franchise will, at the very least, have a history from which you will be able to make certain decisions.  Even if the company was not profitable in the past, your strengths may lend themselves perfectly to turning it into a viable venture.  Furthermore, it is easy to investigate and verify what the company did in the past that resulted in the current status of the operation.

Purchase Price Differences

Buying a franchise or an existing business does not mean that it will cost you more.  In a franchise business, the franchisor provides a structured way of doing business, ongoing guidance, systems and assistance in return for periodic payment of fees and/or purchases.  In fact, many times it’s less expensive than building a new franchised location or launching a start-up.  Even in those cases where it may require a premium, at least you know what you are getting if you investigate it properly.  

With a new franchise, a good franchisor will do demographic studies on population, drive-by traffic, potential customer base and a whole series of studies that will indicate that ‘theoretically’ the business should do well.  However, the only thing they cannot guarantee is whether or not you will be successful. Also, new locations can take a year or more to build. You can avoid all of this when buying a business that has a trading history.

Flexibility in Negotiating

You should have far more flexibility when negotiating the purchase of an existing business or franchise versus any other options available, it’s not even close! Everything from the purchase price to financing is open to negotiation.  Doesn’t it make more sense to put yourself into an environment where you have the greatest number of options available?

Risk management

A franchise can be a significantly less risky way of buying a ‘turn-key’ business, particularly for those with little or no business experience.  The assistance of the franchisor should be available to help franchisees through the establishment and growth phases. The Franchising Council of Australia and the Australian Competition and Consumer Commission websites should provide more information in respect of understanding franchising which should assist you in evaluating the difference between good and poor franchise businesses.

Advantages of buying a franchised business

Some of the advantages of buying a franchised business are:

  • franchises offer the independence of small business ownership supported by the benefits of a big business network;
  • established market for well established brand, reputation and product or service;
  • standardised and tested methods of operation and systems;
  • on-going support for the life of the franchise in respect of marketing, training and management support guaranteed by your agreement with the franchisor;
  • provision of finance, in some cases or you may find it easier to secure finance for a well-known franchise;
  • assistance with site selection, lease negotiation, site development, builders and shop fitters;
  • access to group/national market research, along with advertising and merchandising assistance;
  • access to established financial systems and checks which can provide early warning signals to highlight trouble spots;
  • greater buying power;
  • staff training – you don’t necessarily need business experience to run a franchise; and
  • franchises have a higher rate of success than start-up businesses.

Disadvantages of buying a franchised business

Some of the disadvantages of buying a franchised business are:

  • lack of independence and freedom;
  • initial cost of purchase and ongoing fees such as royalties;
  • restricted territory in which you may operate and/or promote your business;
  • variable quality of franchisors;
  • effectiveness of the marketing;
  • cost of merchandise;
  • restraint of trade provisions on the sale or termination of the franchise that may be more onerous than required if a non franchised business is sold;
  • at the end of the franchise term, the franchisor is not obliged to renew the franchise, in which case the business and its goodwill revert to the franchisor;
  • exit costs outlined in the Franchise Agreement; and
  • bad performances by other franchisees may affect your franchise’s reputation.