last updated 05/05/2022
Reality check - why buy a new franchise?
last updated 05/05/2022
3 May 2022 - Should new business owners follow a broker's advice to buy an established business rather than start up a business from scratch? Not necessarily, suggests Simon Lord
A recent article by Chris Small, managing director of ABC Business Sales, suggested that new business owners are choosing to buy an established business rather than starting up a business from scratch. He says that while starting your own business sounds exciting, invigorating and cost-effective, the reality is actually quite different - especially the statistical reality. ‘The failure rate for start-up businesses in New Zealand is a shocking statistic, and the challenge for those sorts of businesses with an unproven business model and no trading history has become even greater in this Covid environment. However the success rate for acquired existing businesses are quite the opposite.’
While there’s a lot in what the highly-experienced broker says, his article doesn’t take franchises into account. Since ABC suggests that the average business price has increased by 15 percent in the last financial year, I’d like to suggest that buying a new franchise outlet without paying for established goodwill could actually offer you better value – while still reducing the risks involved.
In his article, Chris identifies five key reasons why start-up businesses generally have a higher failure rate. Here they are, along with my own comments on why these don’t apply to franchises.
1. The business model is unproven and inadequate/relevant customer research/history
While starting up your own business from scratch is risky, buying a franchise means that you will benefit from the experiences of tens, hundreds or even thousands of franchisees who have gone before. The business model will have been proven many times in many different markets, and you will have access to all that experience.
2. Commercial and financial terms will be onerous given the business has no trading history
An individual operator will certainly face challenges borrowing money and establishing favourable terms with suppliers – but not if they are part of a franchise which already has good deals in place based on its trading record and bulk buying power.
3. Staff, systems & processes are all unproven
Tell that to Columbus Coffee, Pit Stop, Rodney Wayne or V.I.P. They have decades of experience and are constantly updating their training and systems to meet new challenges.
4. The entrepreneur does not have the relevant experience to successfully start and run a new business
Running your own business requires you to be on top of all sorts of areas at once, from staffing to production to service to purchasing to cashflow management and credit control – not to mention sales and marketing. No wonder failure rates are so high for independent operators! But if you buy a franchise, you are selected for your ability to succeed, trained in the skills you need, and given proven systems and processes to follow.
5. No brand equity or trading history with the relevant customer base
When you buy a franchise, you start with the advantage of a known name over the door or on your van. That’s why you’ll see a queue outside every new McDonald’s, but not outside a local independent yet to make its reputation. The same applies to Pizza Hut, Ecomist or Caci – people in your target market know who you are and what you do, even before the launch marketing kicks in.
So if you are looking for a business opportunity, don’t discount starting something from new – if it’s a franchise. Of course, all these advantages don’t apply to every brand, but if you choose carefully then a new franchise could offer more advantages than you ever dreamed of.
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