Is Buying a Franchise the Best Way to Get Into Business?

Buying a franchise resale may be the safest way to get into a business. Buying an existing business has always been a secure way to buy a company. An existing business has customers, vendors, and history that can be analyzed and insight into future performance. According to the Small Business Administration, starting a business from scratch is a complete unknown, with a failure rate of 66%. Bloomberg says, “8 out of 10 entrepreneurs who start businesses fail within the first 18 months.”

Top Reasons New Businesses Fail

1. Not Investigating the Market
2. Flawed business model
3. Bad location
4. Failed advertising and marketing
5. Failure to change with the market
6. Inability to hire and train employees

How To Buy A Business With Less Risk

Buying an existing business is a less risky way to get into business than a start-up, but there may be an even safer way. Buying an existing franchise can be an even safer path to entrepreneurship. A franchise resale is like buying a regular, but the franchise takes it further, making it less risky by solving the top reasons companies fail. Most small businesses maintain incomplete financial records that don’t offer enough clarity for buyers to make informed decisions. Tax returns typically underreport income to minimize tax liability and confuse the business’s financial health. Additionally, relying on an owner to have implemented the best practices does not compare to a franchise. A franchise has proven its business model on multiple franchised units and has vast experience in different markets to continually make refinements to deliver the best results.

The Franchise Disclosure Document

Franchises are held accountable by the U.S. Federal Trade Commission (FTC) and local state agencies for oversight and reporting. Franchises must file a financial disclosure document (FDD), which details information about the franchise that aids in due diligence. This data surpasses what most privately held companies can provide about the business and the overall market.

The Franchise Disclosure Document is a legal document available to prospective franchised buyers in the pre-sale disclosure process. The FDD contains all of the information that state and federal franchise regulators consider relevant to a franchise investment, and it is a critical document in researching a franchise. Information in the FDD includes the franchisor’s history and its executives’ business experience, the fees that the company charges, the requirements for purchasing inventory, the franchise agreement, and three years of the franchisor’s financial statements.

The Franchise Disclosure Document Item 19

Item 19 as it is a critical part of every franchise disclosure document. It shows earnings, cost, and other key factors likely to affect future financial performance. Item 20 shows if the number of franchises is increasing or decreasing. Item 20 also contains contact information for current franchisees that you can use to contact franchisees as part of your due diligence. The combination of the FDD and traditional due diligence will offer great insight into the potential of a franchise under your ownership.

Franchises come with fees and royalties, which nobody likes, but they are fair value with the right franchise. One benefit of the franchise model is scalability in a way a privately held company doesn’t. You can operate single or multiple franchises with the same systems and procedures. You can now have an opportunity to increase your gross sales and profitability to the extent you want to grow your franchise and buy additional franchises until you reach your goal.

Buying Franchise Resales

There are ample low-cost franchise resales, but you must dig a bit to find them. We researched and found solid franchises that will all eventually end up in the franchise-resale market. You will have to contact the owner directly to see if there is any interest in selling.   Franchise resales take some work to find, but they are hard to beat when you do.  Franchises don’t put a for sale sign in the front yard like a house. They prefer a discrete transaction where the general public doesn’t even know that it was ever for sale. It’s terrible for the reputation and viability of the franchise if franchisees are going out of business or being sold at a high rate. This would not reflect well on the health of the franchise. Also see top franchise rankings  by Entrepreneur Magazine.

Finding Franchise Resales

The best way to find a franchise resale is to approach owners independently with the utmost discretion. Sources like LinkedIn are a great place to reach out to owners who have owned the franchise for a long time. They are more likely to welcome an offer to buy their business to retire or pursue other interests. You can also mail or hand-deliver a private note to an owner expressing your desire to explore the possibility of a purchase. Employees, customers, or vendors should never see or hear your communications about your intentions. This will kill the deal immediately if it isn’t kept secret. Include your professional experience that demonstrates you can operate the business. Also, explain how you will fund the acquisition. Another deal killer is asking the owner to finance any part of your purchase before establishing a professional relationship. You should check if the franchise is SBA approved so you can secure financing. The ties should include mutual respect and some social capital. Buying a Franchise is hard work if done correctly, but buying the most profitable franchises is necessary. Contact us should you have any questions or need help purchasing a franchise.