New vs. Established Franchise: Which Is Best?

If the Opportunity Allows, Explore buying Someone else's Business

© Sandy Smith

Sep 5, 2008

There are many factors to consider when weighing taking over an existing franchise vs. opening a new one. Obviously, the territory may already be sewn up by the existing franchise, so the question becomes how badly does the potential franchisee want to own that brand.

Pros and cons of buying an existing franchise

Pros:

1. No need to worry about start-up costs: The franchise already exists, so the cost of renovation and leasing should be taken care of ahead of time. That saves some of the time on the outflow of cash before the first dollar comes in.
2. Some employees are already in place. This, of course, can be a negative too, since it may be harder to transition employees than to hire new ones. But a first-time business owner can rely on at least some of his employees to know the systems. Because they'll be fearful of losing their jobs when a new owner comes in, it's reasonable to expect best behavior, at leaset for a while.
3. Customers should know the business is there. Buying an existing business, if it is successful, also buys a built-in clientele. Then, it's up to the new franchise owner to expand, not start from zero.

Cons:

1. Just like with a used car, the purchase may merely be taking over someone else's problems. Is the location bad? Is the franchise itself struggling? Are the employees hard to work with? Or is there a legitimate reason that the owner wants out (illness, lifestyle changes, retirement, etc.) If the business is struggling, make sure to know what the root of the problem is.
2. It likely will cost more than starting one up. If the business is strong or successful at all, the purchaser will be paying the current owner for some of his goodwill that he's built in the community, plus the time he's spent training employees and developing the overall business.
3. The previous owner may have burned bridges with customers. And simply hanging out an "under new management" banner may not be enough to get them back.

Pros and cons of starting a franchise from scratch

Pros:

1. The new franchisee has absolute independence in site selection. Of course, this must fall within the framework of the franchise agreement, but the location can go into the hot new development, not stay in the location where it's been for the past few years.
2. The employees are hand-picked by the new owner. While this may make for a learning curve for the new staff, it also means the new owner doesn't face the "yeah, but we've always done it that way," attitude, or have to retrain to his or her way of doing things.

Cons:

1. Time works against the new start-up. Money is going out as the building is built or renovated, staff is hired and equipment and supplies purchased. Yet, the doors aren't open, so no money is coming in. Underfunding is one of the biggest reasons new businesses fail.
2. All aspects of the business must be built: Nowhere is this more important than in letting the customers know that a new business has opened, so marketing and advertising must be established. Still, there likely will be days when there are few or no customers coming in as the business builds.

Once can't purchase what doesn't exist, obviously. So if a franchise isn't in the market, or isn't for sale, buying an existing one isn't an option. But even if that option presents itself, it doesn't make it the best deal. As with any franchise purchase, fulling knowing what's expected and where the pitfalls lie will offer a greater chance of success.

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