by Simon Lord
last updated 25/03/2021
Why Buy A New Franchise?
by Simon Lord
last updated 25/03/2021
12 good reasons why buying a new franchise can make more sense than buying an existing one
When you look at buying a franchised business, you’ll often have two options – buying a brand-new location that you’ll need to set up from scratch, or taking over an established business that has been run by an existing franchisee or under company management.
An existing outlet might seem tempting. It will have an established customer base, positive cashflow and, if it employs staff, trained people in place who can help as you get to grips with the challenge of running your own business. But buying a new franchise – what some franchisors call a ‘greenfields’ location – can offer even more benefits. Here are 12 key points to consider before you make your decision.
In most cases, a new franchise will cost less than an established one, because you will not be paying a premium for ‘goodwill’. Goodwill is the reputation that a business has built up – the factor that has customers coming through the door and results in proven sales performance. If a business is profitable, you can expect to pay a significant amount for goodwill over and above the value of the business’s equipment, fit-out and other assets - and established businesses are in short supply at the moment, driving prices up.
A new business may not have those sales yet, but something to bear in mind is that a franchise with a well-known brand will already have goodwill in a brand-new location even before it opens its doors. That’s why you get queues outside a new McDonald’s, or why companies like Aramex or Jim’s Test & Tag can provide new franchisees with work from their very first day.
It’s said that when a new franchisee takes over an existing business, the turnover goes up – or down. One thing it rarely does is stay the same. The risk is that when you buy an existing business, it may already have got as good as it’s going to get. The seller might tell you about all the potential it has, but if it’s so easy to grow, why haven’t they already done it? Unless you’re buying a business that has been poorly-managed and are confident that you have the skills, energy and ability to turn it round, growth isn’t always easy.
When you buy a franchise unit in a new location, you may start with a turnover of zero but you have massive potential. Benchmarking should enable you to see what is realistic in any particular location and you’ll have a lot of support from the franchisor to help you achieve it. Listen to that advice, put it into practice and growth will follow.
3 Capital gain
Let’s look at goodwill again from the opposite direction. When you start a new business, not only are you paying nothing for goodwill but, as you build your reputation and client base, you are developing goodwill of your own. When the time comes to sell, that increases the value of your business and the price you can get for it.
In many cases, the capital gain you achieve on buying a business, building it and selling it for a much higher price, will be effectively tax free. It’s much harder to make a similar level of capital gain on an existing business.
If you’re looking for an existing business within a franchise, your choice will be limited to those which are currently for sale. This means you may need to look at moving to a new area, or face a long commute, to get the business you want.
If you’re prepared to do that, fine – but opening a new franchise might allow you to be exactly where you want to be with far less disruption to your home life. Starting a new business is a time when you need all the family support you can get, so keeping things simple may be a better option.
New shopping areas and housing developments are springing up all the time. If you want to take advantage of these new markets, you have no choice but to open a new business to service them – and a franchise offers many advantages.
Franchisors will usually have done their homework on where and when a new unit will become viable, have the contacts to acquire the best locations and the negotiating power to do the best deals. Where retail premises are required, landlords will come to franchises first looking for established brands to provide pulling power and marketing muscle – the muscle that will bring you customers from day one.
And a new business will come with a full-term lease, meaning you can arrange funding over a longer period. You can also negotiate things like the rental bond, lease terms and fit-out contributions to suit you, whereas with an existing business you can inherit some less-than-favourable terms or escalation clauses.
6. New fit-out
Franchisors – and landlords, too – know the value of keeping an outlet looking bright and fresh. Most will require a revamp every three to five years, and this is unlikely to be cheap.
When you buy a new franchise unit, you have all that time to build your business before a re-vamp becomes necessary. If you buy an existing unit, you’re likely to have less time, and if you’ve stretched your budget or borrowing to the limit to buy into the business in the first place, that could give you problems.
7. New equipment
Much the same applies to the equipment you need to operate your business, whether fixed or mobile. With a new franchise, you’ll be provided with the latest equipment chosen by the franchisor to be appropriate to the business you are operating. It will come with training, support and guarantees, and may even be able to be financed via an equipment lease, using up less of your precious capital.
Buying an existing business means buying used equipment. It may not be current standard, you don’t know how it has been maintained and, if it proves unreliable, there won’t be much you can do about it. I know of one multi-unit franchisee who, on selling one of his units, first transferred all the newer equipment out of it to one of his other stores before the purchaser came in. Which brings us to …
8. Know who you’re buying from
When you buy a new franchise, you are buying direct from the franchisor – someone who you will be working with for the next 5-10 years, someone who wants you to succeed and grow, someone who has a reputation to maintain and also has plenty to lose if you should fail. If they are a member of the Franchise Association, they are also bound by a Code of Practice and a Code of Ethics, and are required to provide a full disclosure document prior to your signing the franchise agreement.
That’s a very different story from an outgoing franchisee. They will have no ongoing relationship with you or the brand – their primary concern is, understandably, to capitalise on their hard work by getting the maximum price they can for the business.
In a new franchise, all the operating systems and equipment will be set up properly from the very beginning. They will be the very latest systems, building on everything that has gone before, and designed to work together as efficiently and profitably as possible. Crucially, they will also be the systems that you learned during your training period.
Buy a re-sold franchise and all sorts of things will vary subtly from what you learned. It will take time to spot the differences, to learn them and work out how to change them. Remember, also, that having non-standard systems or equipment may make it more difficult for the franchise support team to help when you have a problem.
10. Settling in
When you set up a new business, it grows with you – you (usually) have time to adjust to the everyday demands and challenges, and to get used to processing work efficiently. This means you can give every customer the type of service you want them to be impressed by.
Take over an existing business and you’re likely to be flat-out from day one. If you can’t cope with that, customers will think the business has gone downhill since you took over. It’s a lot harder to win them back if they start going somewhere else.
11. Set your own culture
An existing business comes with an existing culture. If you have staff, they will be used to doing things a certain way – the way the previous owner wanted. They may be great and supportive, or they may have fallen into bad habits and not be operating the franchise the way it’s supposed to run – the way you will just have learned. That can lead to problems as you try to take charge.
A new franchise gives you the opportunity not just to select the people you want to work with and train them accordingly, but to train your customers, too. How do you want them to think of your business? How often will they come to you? What do they expect to buy from you? If you’re mowing their lawn, are you also removing their garden refuse? If they like your coffee, will they also think to come to you when arranging lunch with a friend? It’s easier to set up perceptions than change them.
12. How far can you go?
The final point comes down to what sort of challenge you want to take on, and what will give you most satisfaction: taking over an existing business or starting a new one from scratch?
If you have an entrepreneurial streak, have confidence in the franchise you choose and have confidence in your own ability to listen, to learn, to apply yourself and, if necessary, to build and lead a team that shares your goals, then buying a new business and setting it up from scratch could prove more rewarding than anything else – both personally and financially.
You’ll certainly have to work hard and put in the hours, but you’d have to do that anyway to make a success of an existing outlet. With a new business, though, you’ll have the satisfaction of seeing it grow from nothing and knowing that you did this. And you’ll also have the excitement of seeing just how far you can take it with the support of the franchise behind you.
For some, taking over an existing business with existing cashflow feels like the safe thing to do. As the above points suggest, though, that’s not always the case – and the greatest potential often lies in the new.
Thanks to the existing and former franchisors whose brainstorming session gave rise to this article: Stuart Deeks, Brian Mooney, Martin Smith and Gary Turton.
This article appeared in Franchise New Zealand magazine (Year 30 Issue 1). You can also read it in the digital magazine here.
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