First-time franchisees sometimes struggle with the decision to either start a business of their own or invest in a new franchise.
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Either way, they end up investing no small amount of time and effort into getting a new business off the ground when they could have been doing business from Day One.
To eliminate the hassle of starting a new venture, many franchisees simply buy an existing franchise. While buying an existing franchise can be the first step toward a successful career in small business, it can also be a recipe for disaster. Here are five tips that will give you the information you need to separate the diamonds from the rough.
Compatibility is important in buying an existing franchise. Right out the gate, you need to be comfortable with the franchise's industry and the type of business it does on a daily basis because when the smoke clears, you're going to be operating the business day in and day out for a long time to come. However, you also need to share a certain amount of compatibility with the previous franchise owner because you will be forced to work with this person for several months (or longer) until the deal is complete. If the current owner is a jerk now, it's only going to get worse down the road.
Check Your Emotions
Buying a business is a lot like buying a house. It's a long-term investment that will have long-term financial consequences for you and your family. Like a house, it can also evolve into a buying process in which your final decision is based more on your emotions than on the facts. Don't let this happen! Check your emotions at the door and make your decision for the right reasons.
Whenever you buy an existing business, it's critical to conduct your own investigation of the business' financial health and legal status. Existing owners are valuable sources of information, but sometimes they are tempted to misrepresent the facts in order to make the business more appealing to prospective buyers. Confirm the owner's claims by reviewing the business' financial statements, talking to employees, and consulting your legal counsel.
Consider Owner Financing
It is not unusual for existing franchise sales to involve some form of owner financing. Banks are typically not interested in fully financing a new business, especially if the new owner has little or no collateral or small business experience. So to make the sale, most franchise owners are willing to finance a portion of the sale. After you've explored all your options, inquire about owner financing and negotiate terms.
The discovery process involved with buying an existing franchise can take several months or more. Eventually you will feel comfortable enough to make an offer and then the negotiation process begins. Once you and the existing owner have agreed on the terms of the sale, do everything you can to close quickly. If too much time elapses between the end of negotiations and the closing, there is a chance the owner will reconsider the terms and reopen the negotiation process, and that's bad news for you - the buyer.