buying a franchise
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hen 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.
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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.
12 good reasons why buying a new franchise can make more sense than buying an existing one
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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. 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 V.I.P. or Jim’s can provide new franchisees with work from their very first day.
2 potential 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 (see page 62) 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.
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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
Franchise New Zealand
Year 27 Issue 01