Buy an Existing Business or Buy a  Franchise? Two Paths Toward Business Ownership

Entrepreneurs can take more than one path toward business ownership. They can start businesses from scratch; they can also purchase existing ones. When you opt to purchase an existing company, you still have to choose - buy an existing business or buy a franchise? Let’s explore the two options. 

What Is a Franchise?

Entrepreneurs who take the franchise path purchase franchise units from franchisors and become franchisees. The franchisee purchases licensing rights from the franchisor or a unit for a fee. Then, they become part of the franchisor’s network. Just like that, you can own a Starbucks, European Wax Center, or Popeye’s location.

The most popular franchises in 2022 include:

● KFC

● 7-Eleven

● McDonald's

● Marriott International

Franchising creates a win-win situation for both parties. It allows entrepreneurs to become stakeholders of their favorite brands and valuable companies. For example, the first Mcdonald's opened in 1955 and has held its own for decades. In 2022, the burger restaurant has just over 35,000 franchised locations. The average franchisee makes an estimated $150,000 annually. 

Franchisors also win for several reasons. They expand their brand without investing additional resources. Plus, franchisors receive ongoing royalty payments. 

Franchising Pros

Opting to purchase a franchise provides many benefits for entrepreneurs, such as:

● Name recognition

● Established business operations

● Built-support system

If you open a McDonald’s, it’s a worldwide known brand. Therefore, you won’t have trouble finding hungry customers. Franchises come with business operations blueprints, so you don’t need to reinvent the wheel. When you have questions, you have a built-in support system at your disposal.

Franchising Cons

On the same note, franchising means becoming part of an infrastructure created by the franchisor. There’s no room for stepping outside of the box. Thus, some cons of purchasing a franchise are:

● Strict adherence to established business operations guidelines

● Upfront investment

● Ongoing royalty payments

In 2021, entrepreneurs owned an estimated 750,000 franchise units. Plus, an estimated 45,000 franchisees owned more than one unit. Therefore, many entrepreneurs navigate this business model well. They don’t mind paying the ongoing royalties that range between 4% to 12%. These entrepreneurs also don’t mind adhering to their guidelines, including marketing, moral codes, and branding.

Remember that the more profitable the franchise, the more you will pay the franchisor upfront on top of a franchise fee. Typical upfront costs range between $50,000 to $200,000.

Buying an Existing Business: What Does that Entail?

Instead of starting a business from scratch, some entrepreneurs opt to purchase an existing one. The clear advantage is obtaining the infrastructure from the previous owner, including licenses, permits, and insurance. Suppose you procure a company that still has time left on its insurance policies, permits, and licenses. In that case, you have time to figure out the establishment’s new direction before making additional investments. 

Even if you purchase a business from a distressed owner, it’s an opportunity to capitalize on it. Maybe the food was great at the restaurant, but the owner experienced too much employee turnover, so it suffered. Hanging an “Under New Management” sign is a great way to attract local customers. People like to check out what’s new in their neighborhood.

Pros

Purchasing an existing business offers many advantages, including:

● Market-tested products or services

● Reduced startup costs

● Existing customer database

Buying a business also means that entrepreneurs don’t need to reinvent the wheel - the previous entrepreneur already did. They also tested products and services and saw some success. Therefore, you’ll see lower startup costs and acquire an existing customer base.

Cons

On the flip side, you’ll deal with some challenges, such as:

● Need for operational changes

● Reputation management

● Due diligence

Reputation issues are one reason why business owners sell their companies. Running out of financial runway is another. Entrepreneurs must complete due diligence on all potential purchases. The information will help you negotiate a favorable sell price.

Differences Between Franchises and Existing Businesses

Ownership type is the main difference between purchasing an existing business or franchise. Franchisees own their respective units and locations - but not outright, per se. You invest in the right to profit off an existing brand. However, you must maintain the standards outlined by the franchisor. 

When you directly purchase a company from the owner, the owner relinquishes all ties to it. Thus, you can lean on continuity or head in a completely different direction. 

Things to Consider Before Making a Decision

Both paths toward business ownership require the exchange of several documents. It’s also a process to find a suitable establishment. Ask yourself a few questions that help you walk the right path from the jump.

Buy an Existing Business or Buy a  Franchise? Two Paths Toward Business Ownership

For example, how much control do you want over the company’s operations? An existing business will give you 100% control over the operations. Franchisors will provide you with a degree of control.

Other questions to ask yourself are:

● What kind of lifestyle do you hope to live as an owner?

● How much upfront investment can you afford?

● Do you have a business specialty?

● What is your business experience?

● How much time can you devote to getting the company off the ground?

Entrepreneurs who can devote at least 40 hours a week to lifting a company off the ground can handle purchasing an existing business or franchise. Those who do not have prior experience running a company benefit from the built-in support system that franchising provides.

However, entrepreneurs with a vision who want to control the company’s direction should lean toward buying an existing company. 

What’s Next?

In both cases, you need to gather your investment. The median sale price for a business hovers at $350,000, and the average initial investment for a franchise is $250,000. Then, gather your credentials. Some documents that the seller might expect are:

● Letter of Intent

● Offer-to-Purchase Agreement

● Financials

● Bank statements

● Tax returns

Buyers should request:

● Information packets

● License and permit documentation

● Insurance policy information

● Articles of Incorporation

● Vendor and client contracts information

● Lease contract

During the due diligence stage, you want to ensure that the company is zoned correctly, has no environmental concerns, and has earning potential.

On average, it takes between six to 12 months to purchase an existing business. It takes between three to four months to finalize a franchise unit purchase. It’s no secret that each requires a time commitment on top of a financial one.

However, you don’t have to complete the process alone. Professionals remain at your disposal. 

Call the Professionals

If you intend to purchase a business in Sacramento, call us. After a free consultation with our Sacramento business broker team, we’ll help you with your search, due diligence, and purchase.