Franchise vs. Existing Business

April 13, 2006

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A more difficult decision than deciding whether to buy a franchise or start a business from scratch is whether to buy a franchise or buy an existing business. The difficulty lies in the fact that both the franchise and the existing business have many similarities, such as:

Both are (presumably) successful business concepts. If they weren't successful, you wouldn't be considering them now.
Both will cause you to pay a premium for the successful business concept. A franchise may be more costly due to its previous track record of successes.
Both have name recognition. The existing business will have at least local name recognition while the franchise may have local and even national name recognition.
Both may provide management support. Management support should be inherent in the franchise purchase. Management support generally isn't included in the purchase of an existing business but can be structured into the deal by retaining the seller to stay on as a consultant for a period of time.

Here are a few things that the purchase of a franchise will provide to you that the purchase of an existing business will not:

Continuous management support. One of the core concepts of a franchise is that the franchisor provides management support for the life of the franchise. Even if a seller has agreed to remain a consultant for an existing business, that consulting arrangement is for a limited period of time. After the consulting arrangement ends, the buyer is on his or her own.

Greater exposure. A franchise will usually provide greater exposure to new customers through national advertising campaigns and name recognition.

Costs shared. Expenses that apply to each franchise, such as advertising, may be pooled to take advantage of group discounts.

Less risk. Franchising succeeds only if the individual franchisees are successful. Thus, the franchises are packaged in a manner that will enable the franchisee to succeed. The franchises are usually based in whole or in part on previously successful franchise arrangements. In comparison, an existing business may not have any history other than its current one. Although an existing business is successful for the current owner, that success may not transfer over to another owner.

Complete business methodology. A franchise can provide a training program to teach the franchisee about the business operation and industry, even if the franchisee has no prior experience.

In choosing between a franchise and an existing business, you'll just have to decide whether these extra features you get are worth the cost you'll have to pay for them.