Buying an existing business offers several advantages over starting a business from scratch. It typically comes with an established customer base, unless you will move the business to a new location. Along with tangible goods and an established name, you are also buying the background and reputation of the business. Relationships with vendors, marketing materials, media contacts, and operational procedures will all contribute to the valuation of the business.
Once you have decided to buy an existing business over starting a new one and building it from the ground up, your next decision will be whether to buy an independent business versus a franchise. The advantage of buying an independent business over a franchise is that the business you buy is yours to do with what you will. You do not have to maintain any aspects of the business that do not increase profits, and you can implement new ideas as you see fit. In fact, some business buyers look for struggling businesses that are undervalued because they know they can improve their profitability. Once the transition has been made, as the new owner, you have the full decision-making power.
Of course, with greater flexibility and full control comes increased risk. After all, as an independent owner, the business is contingent on your decisions. For this reason it is not always easy to obtain the necessary financing without an established track record of running such a business. But the Small Business Administration (SBA) and other organizations routinely offer funding to first-time business owners.
If you buy into an established franchise, part of what you are buying is brand recognition. You are buying into an established company with operational plans, guidelines, training, and support, in part because you are not responsible for making all of the key decisions. This makes it easier to obtain financing. In fact, many franchisors even offer their own financing plans.
When purchasing a franchised business, you also receive marketing materials, advertising, and the tried and true methodology of the franchising company. Everything has been tested and proven to work, from menu choices in fast food franchises to the layouts of individual locations. Therefore, unless you buy into a new, or struggling, franchise (and you need to learn as much as possible about the franchisor before you buy), you can buy your way into a business with less risk attached than purchasing an independent business.
Of course, buying a franchise is not for everyone. As a franchise owner, you are essentially running, or managing, a business that is not totally under your control. Franchises have many established guidelines that must be followed, and your choices are limited with respect to what you sell, how you can advertise, the appearance of your location, and many other factors. Many of the terms of a franchising agreement are non-negotiable, meaning you will essentially “have it their way.” If you are someone who is seeking significant control, looking to implement new strategies, and eager to make the key decisions, franchising is not for you.
In making your decision, you have to ask yourself the following questions:
- Am I looking to call all of the shots?
- Am I comfortable playing by someone else’s rules?
Your answers to these two questions will help determine in which direction you should proceed.