Buying a new franchise versus an existing franchise site – part two

Buying a new franchise versus existing franchise business is one decision you may be faced with when deciding which franchise to buy. There are pros and cons to both options and outlined below are some considerations around Goodwill, Capital and Staffing.

Goodwill and service standards

When purchasing an existing franchise business you need to consider what the outgoing franchisee’s relationship is with the local community and the standard of customer service provided. This is sometimes referred to as goodwill.

If there has been poor customer experiences this may take some time to rebuild although may also provide an opportunity for you to increase service standards, win back customers and attract new customers, therefore increasing the value of the business.

Similarly, if the franchisee community engagement and customer service levels have been high, you will need to ensure these standards are maintained.

Need for operating capital

If you start your own franchise site (greenfield site) your capital needs may be higher, however you may have purchased the site for a lower price than an established franchise business. However, if the purchase price of the established business is lower than opening a new site, you will need to investigate the reasons why to ensure you’re making a good investment.

When starting a business from scratch it usually takes some time for the business to become profitable, so in addition to the start-up costs you need to ensure you have enough capital to cover operating costs (as well as any personal financial requirements) until the business turns a profit.

This could be up to 1-2 years or longer depending on the business you purchase. Some franchises will be able to tell you how long it is likely to take to reach breakeven and then become profitable, based on similar franchise sites; however it’s still up to you to do your own calculations to see if they appear reasonable.

It’s a good idea to ask franchisees of similar sites how long it took them to reach breakeven.

How do I calculate breakeven?

You may be interested in our Franchise Business Management Essentials online course which shows the formula for calculating breakeven along with other techniques for creating budgets, cash flow forecasts and other essential skills for managing a franchise business. Alternatively you can learn by joining a finance workshop (2 days) to learn about breakeven, four forces, setting targets and other profitability management techniques, see Franchisee Financial Essentials Workshop.

If you’re purchasing an existing franchise also consider if you’re likely to be asked to undertake a brand refurbishment during your franchise term, as well as replacing any aging equipment to run the business, and how often new equipment is required by the franchisor for new products, to ensure you factor these costs into your assessment. Running out of cash is one of the most common reasons businesses fail.

Staffing

Depending on the franchise you buy, you may be required to hire staff. If you buy an existing franchise you receive the benefit of having staff already trained in the franchise procedures, however you will need to consider if any ‘key’ staff required to run the business will stay on or move on after the business sells.

Alternatively when you start a new franchise outlet you will have to hire and train all your staff yourself. While this will take a lot more work advertising, hiring and training, it does allow you to select the type of people that will work for you, and provides the opportunity to create the culture you want from day one.

Other elements to consider

Starting a new franchise (greenfield site) can be attractive, however, unlike buying an existing business, there is no trading history or existing customer base which may be perceived as a greater risk and require extra operating capital and time to break-even.

Each franchise opportunity needs to be assessed against your personal financial and lifestyle goals, and other personal reasons for entering franchising.

As a prospective franchisee you’ll need to be checking and double-checking any figures provided by the franchisor or previous owners of the franchise business and make your own assessments to verify whether information provided is accurate.

Buying a franchise is a big investment and one worth spending the time and resources to ensure that you’re selecting a profitable franchise and the right franchise for you, regardless of whether it’s a new franchise or an existing franchise site.

Additional franchise buying tips

Goodwill, capital and staffing are just a few elements to consider in buying a new versus existing franchise site. Part One of the series looked at, why the franchisee is selling, speaking to existing and former franchisees and tips for assessing site location.