Launching a company from the ground up can be difficult. Purchasing an established company or franchising might streamline the early planning phase.
Know the Difference between Franchising and Buying A Business
Make sure you understand the fundamentals of franchising and purchasing an existing business before deciding which of these options is best for you. What separates franchising from purchasing an already-existing firm is the degree of control you will have over your enterprise.
Franchising Gives You More Guidance but Less Control
A franchise is a type of business arrangement in which an independent businessperson (the “franchisee”) purchases the rights to use the franchisor’s name, trademark, and business model. Franchises are frequently used by hotels, restaurants, and service-oriented enterprises.
There are two typical types of franchising:
- Product/trade name franchising: A franchisor sells a franchisee the right to use the name and trademark of a firm; the franchisor holds the right to the brand or trademark. Typically, supply chain management is the main emphasis of this type of franchising. Usually, the franchisor produces or provides the products, which are then provided to the franchisee for sale.
- Business format franchising: A continuing partnership exists between the franchisor of the franchise and the franchisee. Typically, this type of franchising emphasizes broad-spectrum management of businesses. Usually, the franchisor provides services including product supply, marketing strategies, training, venue choice, and even assistance with obtaining money.
Purchasing a franchise permits you to utilize a bigger brand’s name, logo, and merchandise. Marketing, promotions, and brand recognition will also be advantageous to you. However, it also implies that you have to abide by guidelines about company operations from the bigger brand.
Buying an Existing Business Gives You More Control But Less Guidance
It sounds exactly like what it is when you buy an existing firm. The business is usually fully assumed by the buyer. The biggest benefit is having a pre-existing blueprint that can incorporate crucial elements like a specified operational budget, an established clientele, and fully qualified staff. Nearly every kind of business can be bought or sold, regardless of its type.
Usually, you get total control throughout an existing firm when you purchase it. But, in the absence of a clear strategy, support systems, or outside advice, your company may face difficulties while you learn how to manage operations.
Consider Three Factors before Franchising Or Buying A Business
You can decide whether you want to purchase or franchise a firm by following three basic stages, regardless of whether the business models are different.
- Calculate the amount you’ve invested: Examine your financial situation and determine how much you are willing to spend on the purchase and, eventually, management of the company. This will assist you in choosing the products or companies that fit your budget the best.
- Think about your lifestyle and talents: Since your abilities and expertise can assist you in weeding out impractical company endeavors, be truthful about them. For example, franchising might be the ideal option for you if you like direct help. Conversely, if you’re an accomplished business owner, you might want to think about purchasing an already-existing company.
- Examine the entire terrain: Examine the current infrastructure and confirm that you are aware of all the associated costs before making the acquisition. Never be embarrassed to inquire about leases, contracts, current cash flow, and inventory. The more information you possess, the more capable you will be of making wise choices.
Pick the Right Franchise or Existing Business For You
After deciding whether to purchase a firm or become a franchisee, you must assess each unique possibility. It comes down to this, in essence: exercise due diligence.
Your study ought to assist you in comprehending the company’s financial situation as well as its broader environment.
If franchising piques your attention, investigate:
All reports currently in existence: It’s time to don your detective cap. Obtain a Uniform Franchise Offering Circular (UFOC) to get started. Important information regarding the franchise’s financial, legal, and personnel histories is contained in this form.
Related guidelines and policies: Every franchise is unique. Verify that you will be able to operate in a location that is shielded from other franchisees and utilize the trademark and name of the franchise. Additionally, you should inquire about the franchisor’s ability to provide management support, training, and access to their marketing and advertising know-how.
Contracts: Generally speaking, the franchisor gains more from the two parties’ agreement than the franchisee does. In most cases, the franchisee must purchase inventory, supplies, and equipment in addition to meeting sales targets. Before you sign, be sure you understand everything.
If purchasing an already-existing company is something you’re considering, you should consider:
- Permissions and licensing: You must apply for or get any necessary permissions and licenses from the present owner. Find out what licenses and permits you’ll need to operate your business at the federal, state, and municipal levels.
- Zoning regulations: Your business may be impacted by zoning regulations. Ensure that your company complies with all applicable fundamental zoning requirements in your location.
- Environmental concerns: It’s crucial to review the local environmental regulations(Link is external) if you’re purchasing real estate in addition to the business.
The company’s worth: There are numerous approaches to figuring out what a reasonable asking price is for a business sale. These are a handful:
- Capitalized Earnings technique: This technique focuses on the anticipated return on investment for the investor.
- The excess earning method divides the return on property from other earnings, much like the capitalized earning method.
- Cash flow method: This approach is commonly employed to ascertain the maximum loan amount that a business’s cash flow can sustain.
- Method of tangible assets (balance sheet): This approach determines the business’s worth based on its tangible assets.
- Worth using a particular intangible asset approach: This method contrasts the creation of an intangible asset with the purchase of a desired one.
Get Ready To Buy Your Franchise or Business
After deciding which franchise or company to purchase, it’s critical to carry out an exhaustive, unbiased examination.
At this point, you should seek expert assistance. A lawyer and an accountant might be hired. In particular, the tax regulations for franchisees are very intricate. You can get help analyzing the franchise package and tax implications from a franchise law specialist. An accountant may assist you in estimating possible profit as well as the total expenditures of starting and running the company.
Together, an accountant and an attorney can assist you in drafting and assessing crucial documents. Usually, that comprises the subsequent items:
- Statement of purpose
- Agreement on Confidentiality
- Agreements and leasing
- Statements of finances
- Tax statements
- Sales contract
- Adjustment of purchase price
Reasons to Buy a Business
Purchasing a business is similar to looking to buy a house. While some individuals value the history and charm that older homes have to offer, others would rather have something turnkey since they don’t want the hassles that come with an older property. In a similar vein, purchasing an established business has many benefits but also some disadvantages.
Pros of Buying a Business
Proven Business Concept
The majority of your time while starting a new firm will be devoted to planning. You will need to draft a business plan and choose how to implement the plan.
However, you will usually already have all of this set up when you purchase an existing business:
- A structure or office area.
- Equipment and stock.
- A well-known brand and corporate identity that, whether you like it or not, consumers are aware of.
- Clientele.
- Supply and vendor network, as well as production capabilities.
- Current workers who are willing to impart their knowledge and skills.
- Policies and procedures for management.
- An awareness of the market and your competitors.
Granted, the company might not be profitable just yet, and none of these items may be in excellent shape. But, purchasing an established company means that some structure has already been put in place, saving you time upfront and enabling you to identify the areas that require immediate attention. Getting past the challenging starting period can be a major advantage, especially if you’re testing a new market or joining an industry in which you lack experience.
Lower Operating Costs
A primary advantage of purchasing a firm is the reduction of operational expenses. For example, the initial outlay for supplies, food and drink, signage, and a specially designed kitchen for a new restaurant can exceed $450,000. If you purchase an established business, your initial running costs will be reduced since, unless your acquisition is quite unusual, many business operations are already set up and ready to go once you take over.
These are included in the deal, so you won’t have to spend as much money on marketing plans, staffing, or expanding your clientele. Alternatively, you might invest more money in growing and molding the company to fit your vision.
Easier To Obtain Financing
Lenders and investors view buying a firm as a less risky option than starting a new one, even if it’s not always a safe bet. This is so that a lender or investor may assess the business’s current success and forecast its future using a history of financial performance. Additionally, information about the company’s market position, rivals, level of brand awareness, and clientele already exists.
Due to all of this, lenders may be more willing to provide you with an acquisition loan and investors may be more inclined to invest in the company. Even the present owners may contribute to the financing of the ownership transfer by lending you money.
Intellectual Property Is On the Table
If your prospective company has patented goods, a catchy phrase protected by copyright, or a well-known brand that appeals to consumers, the value of its intellectual property will most likely be transferred to you upon acquisition. This means that occasionally you purchase more when you purchase a firm than what is initially apparent.
Not all business acquisitions include this, but if you’re working with something you believe has room for even more growth, it can be crucial. What if you expanded this little company into a nationwide chain? That copyright and patent suddenly have a lot more value. The sale of software companies, tech enterprises, and creative businesses (such as music, design, and art) frequently includes patents, copyrights, and trademarks.
Cons of Buying a Business
Higher Upfront Purchasing Costs
Purchasing an already-established company might result in cost savings on things like inventory and equipment. But you’ll most likely have to pay some rather high purchase prices. The acquisition expenses may exceed the amount required to launch a new company.
This is because you are purchasing ownership of the following along with the obvious assets:
- Clientele.
- Developed brand.
- Design work, including store interiors and logos.
- Idea and strategy for a business.
- Spending money, time, and effort on product testing.
- Improved policies, procedures, and processes.
- Revenue source (assuming the company is currently making money).
- Resources and apparatus.
- Intellectual property, including trademarks, patents, and copyrights.
When purchasing an existing business, the buyer and seller will negotiate over each of these items, which will ultimately affect the acquisition price.
Unfamiliarity with the Details
It makes sense that, compared to someone who established the company from the ground up, you will be somewhat less acquainted with the inner workings of a company you are purchasing and the specifics of its personnel, operations, processes, and finances. This could be a little challenge, particularly in the beginning. This is particularly valid when joining a field in which you have no prior experience. It will take a lot of time to become proficient, so be ready for a high learning curve.
Risk of a Hidden Problem
You will go through a very rigorous due diligence procedure as a potential business buyer, where you will learn details about the company and its present owner. However, regardless of how much information you find, there’s always a chance you’ll learn something new or that the problem is more serious than it first seems. For instance, the brand might not be well-known, or the equipment might be damaged. Whether you like it or not, when you buy a firm, you also buy those problems.