Franchising VS. Buying an Existing Business

#VETBIZ PROS & CONS: FRANCHISING VS. BUYING AN EXISTING BUSINESS

Have you considered franchising or
buying an existing business as the next step in your #VetBiz journey? Starting
a business can be challenging and these options could help simplify the
planning process for you and your veteran-owned small business – but it’s
important to understand how each process works before diving in.

Here are three questions to ask
yourself when deciding which business method is right for you:

What’s the difference between
franchising and buying an existing business?

The main difference is the level of
control you’ll have over your business.

A franchise is a business model where one business owner (the “franchisor”) sells the rights to their business logo, name, and model to an independent entrepreneur (the “franchisee”). When you buy a franchise, you’ll benefit from the brand recognition and marketing strategies of a larger brand – but it also means you’ll have to follow rules from that larger brand about how to run your business.

There are two common types of franchising:

Product/trade name franchising is when the franchisor owns the right to the name or trademark of a business and sells the right to use that name and trademark to a franchisee. For example, Pepsi and Coca-Cola manufacture and supply soft drink products to franchisees (e.g. grocery stores) who are able to sell them under the existing name and trademark.

Business format franchising opens up an ongoing relationship between the franchisor and franchisee. This style of franchising normally focuses on full spectrum business management, like site selection, training, product supply, and marketing. These are the most common types of franchises – like some restaurants (e.g. McDonald’s) and certain hotels (e.g. Marriott).

On the other hand, buying an
existing business is just what it sounds like. The buyer typically takes over
full ownership and control of the business upon purchase. While you have the
advantage of absorbing the existing blueprint of the business – like an
established customer base and fully trained employees – the lack of
infrastructure and external oversight may make it difficult to figure out the
best way to run things.

What factors should I consider
before franchising or buying an existing business?

First, it’s important to review your
current financial position and determine how much you’re willing to spend to
purchase and manage the business. Once you set your budget, you’ll then want to
consider your talents and lifestyle. What are your skills? How much experience
do you have? Thanks to years in the military, you’re already equipped with the
skills needed to run a successful small business. Identifying your strengths
and weaknesses will help you eliminate any unrealistic business ventures. After
that, it’s time to review the full landscape of your decision. Look at the
existing infrastructure of the business and industry and make sure you
understand everything that comes along with the purchase – from contracts to
leases to inventory. The more you know, the better prepared you’ll be to become
a #VetBiz owner.

How do I pick the right franchise or
existing business for me?

If you’re interested in franchising,
be sure to look into any and all existing reports for details about the
franchise’s legal, financial, and personnel history. Also, make sure you’re up
to speed on the associated rules and regulations for the franchise. Every
franchise is different so it’s important to know the process and what’s legally
available to you (and what isn’t!). And when it’s time to sign the contact,
make sure you understand the entire contract before signing. As the franchisee,
you’ll typically be expected to meet sales quotas, buy equipment and supplies,
and more.

If you’re interested in buying an
existing business, it’s important to become familiar with any federal, state,
or local licenses and permits needed to run the business. Be sure you can
either get them from the current owner or apply for them yourself. You’ll also
want to consider any zoning requirements or environmental regulations in your
area that may affect your business. And before signing that check, make sure
you’ve thoroughly considered the value of the business to ensure that you’re
getting a fair deal.

Pro tip: Once you’re ready to buy,
it may also be a good idea to consider getting professional help from an
attorney or accountant who can help you create and evaluate all important
documents.

To learn more about franchising or buying an existing business as the next step on your #VetBiz mission, check out the SBA website at: http://bit.ly/FebVetBiz6.

This blog was originally written by
the U.S. Small Business Administration’s Office of Veterans Business
Development.

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