While starting a business is easy, growing that business can be extremely difficult; many small businesses struggle for years before getting a foothold in their industry. Even then, there’s no guarantee the business will ever be more than a “struggling startup.” It can be incredibly gratifying to start and grow your own business, but many people simply don’t have the time, energy, or desire to take that risk.
At the same time, however, those people may still have an interest in owning their own business. If this sounds like you, buying an existing business or franchise may be a good option. Of course, taking this route comes with its own set of risks and challenges, and making the decision to buy an existing business or to buy a franchise should not be made lightly.
When you buy a business, you typically take over full ownership of that business. By contrast, buying a franchise is more like a license agreement than a purchase. Franchising comes in two main forms:
The biggest difference between buying a business and either type of franchise is the level of control you have over it. When you own your own business, all the decisions fall on you. By contrast, a franchise offers more structure, but far less control. The blueprint a franchise provides can be quite helpful, especially for business owners with less overall experience running a business. However, the established plan and guidance may feel “constricting” at times.
Businesses and franchises excel in different areas. Buying a business tends be disadvantageous compared to a franchise in the following areas:
This list isn’t exhaustive, nor is necessarily true for every business owner. What one person calls a disadvantage, another might call an opportunity.
Of course, all of that isn’t to say that buying a business is bad. Doing so offers a number of advantages as well:
All these considerations can seem overwhelming at first. Organizing them on a “Buying an Existing Business Checklist” is a great place to start.
Financials are probably the first thing that comes to mind when you think about buying a business or franchise. But there’s actually quite a bit more that goes into either purchase, all of which deserves careful consideration.
An often-overlooked part of buying a business or franchise is the logistics surrounding it. As a buyer, you should understand whether the sale includes the building and other physical assets used by the business.
Further, it is crucial to examine potential liabilities before finalizing the purchase. For businesses, this includes reviewing the company’s debt, including any existing contracts or leases to which the business is bound. For franchises, this means carefully reviewing the franchise disclosure document (FDD) (also called a Uniform Franchise Offering Circular, or UFOC) and understanding your responsibilities and limitations as the franchisee. Required by the FTC, the FDD covers 26 specific “items,” ranging from the franchise’s litigation history and initial or ongoing fees to supplier restrictions to termination and renewal provisions.
Finally, consider whether you’re a good fit for the option you’ve chosen. Which fits your personality and abilities better? For example, an experienced business owner might be more comfortable without the guidance one would get from franchising.
Buying an existing business or franchise with no money is extremely difficult but technically not impossible. Even if you don’t have the personal capital to fund the purchase, you may still be able to obtain a business loan to cover the initial purchase price. Be aware, however, that continuing to run a business or franchise comes with ongoing costs. If you aren’t confident in your ability to generate consistent revenue — and profit — financing a business purely with loans can be a costly mistake.
There are some additional considerations that apply specifically to buying an existing business:
Also, remember to evaluate the business only as it is at the time of the purchase. Excitement about the future and our ideas for the business can tempt us to make decisions based on what the business could be. However, when you buy a business, there’s no guarantee your efforts will be successful.
If purchasing a business outright isn’t feasible, one option is to buy into an existing business as a partner. Although the buy-in price may be high, it likely won’t be nearly as costly as purchasing a whole business. Of course, buying into an existing business as a partner won’t always work; clashes in personality with other partners may add an additional challenge to this option.
We touched on this a bit above, but here are some other specific considerations when purchasing a franchise:
As always, take your time when reviewing these resources.
Purchasing a business or franchise without the help of an attorney or accountant is one of the worst mistakes you can make. The process is complicated, and the only way to protect your best interests is to hire outside help.
It bears repeating that buying an existing business or franchise is not a decision that should be taken likely. Either option is a big investment with plenty of potential risks to consider. If it all seems overwhelming, don’t forget that you can always start your own business with relative ease.
ZenBusiness can help with many aspects of starting, running, and growing your business. Whether you need help registering your business for the first time or you’re ready to build a website and get the proper business licensing, Zenbusiness has you covered every step of the way.
“Franchising” is a way for an established business to license its trademark, trade name, and business structure to someone else. When you buy a franchise, you are purchasing the rights to use those materials and the support behind them. However, you are not buying the company itself.
When you buy a business, you become the owner of not just its name and assets, but the actual business entity itself. As a result, you have complete freedom to control how it is run. Compare that with a franchise, which often has strict requirements for how its day-to-day operations run.
Not necessarily. The barrier to entry for both franchises and buying a business can be high; either option will likely run you tens of thousands of dollars at the outset. Whether buying an existing business is really the “better” option is more dependent on your experience and goals.
If you prefer more granular control and have a thorough business plan in mind, buying an existing business might be the better option. By the same token, if you have less experience or less interest in developing a business plan yourself, a franchise may be the better choice.
It all comes down to what you’re comfortable with and the different opportunities you might have when you’re trying to make the decision.
The process for obtaining a loan is relatively straightforward. Lenders will likely ask for documents like your recent tax returns, a disclosure of outstanding debt, and business financial and bank statements. Additionally, many lenders require certain management-related information about the business you plan to buy, including:
Like other loans, the difficulty of obtaining a business loan largely depends on the credit history of you, your business, and the business you want to buy. As a result, it’s important to speak with that lender directly about what they need to feel comfortable approving the loan. Every lender has a different risk tolerance, and each will consider your equity, collateral, cash flow, or other relevant metric in a different way.
Yes. Rather than buying a new franchise directly from the franchisor, you may be able to purchase an existing franchise. But doing so isn’t without obstacles. There may be restrictions on the transfer of the franchise that make buying one difficult, such as a right of first refusal by the original franchisor.