Candidates sometimes come to me with a plan to buy an existing franchise. Regardless of how they found out about the sale, they’re almost always attracted by the price tag. Someone who’s trying to offload an existing franchise will usually sell the business for less than the total startup cost of a new franchise–but there’s a reason for the discount.
Usually, franchises that are for sale are in some kind of trouble. The exact nature of the problem may vary from business to business, and sometimes it has many layers. Regardless, I haven’t yet encountered a situation where I would recommended that a client buy an existing franchise. Instead, when a client comes to me with this idea, I generally ask the following questions to try and steer them away from the deal.
Do you want to inherit someone else’s problems?
A successful franchisee rarely sells their business. If a franchise is on the market, the business has probably been losing money for a while, and the owner is likely trying to get the cash to buy out their franchise agreement so they can move on. If the situation is really bad, the franchise may have already reverted to the franchisor.
When you buy a franchise in this condition, you essentially inherit someone else’s problems. Financial issues are always a symptom of a deeper cause, so you can be sure you’ll have to tackle an immediate lack of sufficient revenue plus whatever root issue (or issues) is behind it. You could be dealing with a franchise business system that’s inherently flawed and/or a franchisor who doesn’t provide adequate support. Perhaps the franchise is in a bad location, the franchisee didn’t market the business adequately, and/or customers had consistently negative experiences and stopped coming back.
Regardless of how much the franchisee or franchisor tells you during the purchase process, you won’t really get the full picture until you’ve forked over your money and are neck-deep in the business. Then you’ll have to deal with the normal challenges of being a new business owner and whatever issues you’ve inherited. Is that really the way you want to start your journey as an entrepreneur?
Are you up for changing culture?
If the first question doesn’t stall people, I usually ask this one as a followup. Generally speaking, a failing business will have deep-rooted culture and perception issues. Sometimes this happens from the start: the franchisee hires the wrong people and doesn’t lead them well. Everyone performs poorly together, and the business suffers. Or sometimes it happens over time, as a result of the business’s failures. Even if the franchise’s poor performance is not the franchisee’s or employees’ fault, working in a failing business is bad for morale and often leads to burnout.
In addition, a badly performing franchise will have a negative reputation. You might think the franchisor will see you as a savior–someone who’s doing them a favor by rescuing a failing business–and treat you with special consideration. More likely, the franchise’s reputation as a problem property will color the franchisor’s perception of you, and you’ll have to fight an uphill battle to win their respect. The same thing is likely to hold true with customers. At the end of the day, a business rises or falls on the strength of its balance sheet. If a franchise is failing, that means not enough people are buying what it’s selling. And if people are staying away because they’ve had bad experience with the business, you’ve got another uphill battle on your hands.
Concrete problems–like expensive suppliers or poor signage–are comparatively easy to identify and solve. But reputation and perception are highly subjective and abstract. To pinpoint the weak spots and how to fix them, you’ll likely have to go through a lot of trial and error. You’ll have to rebuild trust with both the franchisor and your customers, one step at a time. Everyone will judge missteps harshly. Plus, think about the phrase “under new management” and everything it implies (why did the franchise need new management in the first place?). Is that really the kind of sign you want to put out on your first day as a business owner?
Are you paying a premium for something you could do yourself?
Rarely, a successful franchise will go up for sale. The sale may be planned, with the franchisee intending to fund their retirement or some other major financial goal with the proceeds. Or it may be unexpected, due to a circumstance such as a spouse’s job relocation or a critical illness. Either way, if someone comes to me with a plan to buy a franchise like this, I remind them that such opportunities usually come at a premium.
A franchisee who has invested years of their life in a business and made it successful won’t be selling at a discount. They’ll want top dollar for their prize possession–probably several times what you’d pay for a new franchise in the same network. The vetting process is more rigorous, too. When you buy a new franchise, the franchisor vets you. When you buy an existing one, you have to pass muster with both the franchisor and the current owner. Finally, you’ll have to fill the current owner’s big shoes. The franchisor will have high expectations that you’ll maintain and even increase the success of the business. Especially if you’ve never been an entrepreneur before, do you want that pressure right out of the gate?
What’s the better alternative?
I’ll go ahead and answer this one for you. If you want to become a franchisee, don’t fall into the trap of trying to buy an existing franchise. Buy a new one and build equity in the business through your own accomplishments. Not only is it easier, it’s more satisfying. If price is a consideration, a more affordable new franchise will still be a better bet than an existing one that’s close to failure. Book some time on my calendar so we can talk about how you can do things on your own terms. After all, isn’t that why you wanted to be a business owner in the first place?
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