What to Consider When Purchasing a Franchise Resale Business
Starting a new business from scratch can seem daunting. It would make more sense to purchase an existing business that already has its customer base, location, inventory, equipment and employees in place. However, though it may seem that to own a franchise is less risky than to build a new business, there are several aspects to consider in order to ensure your franchise’s success. Here are some key factors to be aware of when you buy a franchise resale business:
The Franchise’s Climate
Before you buy a franchise, it is important to determine the business climate of the location around your business. It is important to consider the increase or decrease of population in the area and the changing demographic, since this may impact the business. To get a feel of the climate of a location, you should visit the local Planning and Development Office. Proposed zoning laws may affect the “permitted use” of your business.
Owner’s Discretionary Income
The Owner’s Discretionary Income or ODI is the amount of money left after the business owner has paid all the expenses (suppliers, rent, overhead, employees and taxes) to run the business. Before you close the deal to own a franchise, it is important to determine if the ODI is sufficient to live on. It is also important to know if the ODI has slowly been declining over the years. If this is occurring, then it is not a sound business to invest in.
However, if the business’s ODI appears to be in order, you should have the seller write this out for you on a document. Wait a few months to determine if his written ODI is consistent with the financial reports.
Know Your Competition
One of the biggest risks of being a small business owner is competing against a large corporation. This is especially true in the service and retail industries. Knowing where your competition is, even if it means asking them directly about their local building plans, can save you a lot of headache in the future.
Ensure All Taxes Have Been Filed
Before the sale of the existing business has been finalized, you should ensure that the seller has filed all the local and state taxes. To be certain of this, you should have your attorney obtain a clearance certificate. This certificate demonstrates that the seller has paid all the pertinent state taxes owed. If the seller has been dishonest about the sales tax, the state tax authority can legally hold you responsible for the taxes owed. Though suing the seller is an option, it can be a long process.
Business Reputation
Besides the costs and profits of an existing franchise, you are also purchasing its reputation. Look at local newspapers from at least five years back to determine if there was any negative publicity, reviews and complaints. A business that suffers from a bad reputation may be something that you would have to deal with to ensure its success.
Besides following all these steps, the easiest way to get information on a business is by asking the locals in the area. If the business has been in the area for a while, then there will be regulars who have good and bad information concerning the business.
Though none of these steps are quick or easy, they make sure that you are entering a sound and profitable business venture.
