Buying an Existing Business vs. Buying a Franchise: Which Option is Best for You?
If you’re looking to own your own business but don’t want to start from scratch, buying an existing business is a great option. Purchasing a business or a franchise can offer you the benefits of existing branding, marketing, and customer relationships.
The question now becomes, which do you buy: An existing independent business or a franchise?
Deciding between the options can be challenging and depend on your individual goals and professional experience. The main difference between the two is the level of control and risk you’re willing to take on. In this post, we’ll review the pros and cons of each, along with other factors to consider before making a decision.
Buying a franchise
A franchise allows you to use the business model of a larger corporation. Essentially, a franchise is the purchase of a licensing agreement. This licensing agreement can give you the rights to use the existing company’s logo, name, and model. While this method offers more structure and guidance, it comes with less control for you, the business owner.
Pros to purchasing a franchise:
Less risk. When you purchase a franchise, you receive benefits from a proven business model. This helps to mitigate risk and keeps decision-making simple.
Brand recognition and marketing. Part of purchasing a franchise allows you to use the larger company’s logo, brand recognition, and marketing plan, which are already established and well-known to the public.
Training and guidance. Franchises typically have a training program to help new owners learn their business model. As questions and problems arise within your franchise ownership, you’ll be able to receive hands-on guidance through the franchisor and other franchise owners.
Protected territories. Some franchisors offer protected territories to ensure that franchisees don’t compete with each other.
Cons to purchasing a franchise:
More rules to follow. Purchasing an existing franchise will mean you'll need to follow the guidelines already in place by the franchise.
Franchise and royalty fees.
Restricted growth. For the franchises that offer protected territories, you may be required to purchase additional licenses if you decide to expand.
If you find a franchise that you believe is a good fit, reach out to existing franchisees to learn about their experience as franchise owners.
Buying an existing independent business.
Purchasing an existing independent business is just what it sounds like. You will likely be able to take over full ownership of the business. Like a franchise, you’ll be purchasing a business with an existing customer base and established operating procedures. Unlike a franchise, however, you won’t be able to rely on considerable brand recognition or a network of help.
Pros to buying an existing independent business:
Freedom in decision-making. You get to make all of your own decisions rather than referring to the guidelines and rules of a larger franchise. This allows for greater flexibility in implementing your ideas and marketing.
No franchise or royalty fees. While you will need to purchase the business initially, you won’t be tied to ongoing royalty fees.
It’s still an established business. Purchasing an existing business still means that processes and a customer base have already been established. This would not be the case when starting your own business that you’d need to build from the ground up.
Cons to buying an existing business rather than a franchise:
More risk. While you’re still purchasing a business already in existence, you may not have the established and proven business models that franchises can offer.
Limited brand recognition. Smaller, independent businesses may have a more challenging time with brand recognition. They may also have a smaller marketing budget, and the marketing plan is up to you to create and implement.
Lack of corporate leadership and help. While a franchise allows for a network of support and people to turn to, purchasing an independent business can leave you with little guidance from others.
If you decide that buying an independent business is a good fit, start to develop a team of professionals to help you build your business, marketing, and financial plans.
As discussed, buying a franchise and buying an existing independent business come with their own pros and cons. Before making your final decision, here are a few other things to consider:
Finances. This is the time to put on your detective hat and do your due diligence. When considering a franchise, look into the UFOC (Uniform Franchise Offering Circular) report, as this can give you details on the business’s financial background. When considering an existing business, be sure to consider the value of the business, cash flow, etc.
Examine all contracts. When you’re purchasing a franchise, you’ll need to ensure you fully understand what it is. What rules and regulations do you need to follow and have you thoroughly reviewed the contract?
Double-check licensing, zoning, and environmental regulations. Will you follow local, state, and federal licensing and zoning rules with your new purchase? Do a background check before purchasing an existing business or franchise.
Find professional help. Before purchasing this level, having an accountant and attorney can be highly beneficial. A business broker can also be a massive help as they will better understand the industry and businesses for sale.
Consider your lifestyle. Before making your final decision, ask yourself how this new business purchase aligns with your financial goals, risks, and way of life. Do you have experience with already owning a business and long for the control of making your own decisions? Then perhaps purchasing an existing business is right for you. But, if you’re new to being a business owner and would appreciate the help and guidance of a tried-and-true system, a franchise may be the way to go.
Need a little help with the vocabulary, check out Key Terms for Selling or Buying a Business.
Whatever option is best for you, consulting with a business broker before making your final move can be highly beneficial. Contact us today to let us guide you through your business buying decision.