Franchise: Buy New or Used?

A franchise can be a great on-ramp to small business ownership. Here's how to decide on a new or existing franchise purchase.

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Becoming a franchisee can be a great path to entrepreneurship. You can leverage the benefits of an established brand and a proven operating plan and the franchisor may serve as a source of capital--something that is especially helpful in today's tight financing market. However, what's the best way to become a franchisee? Should you start fresh with a new franchise or simplify things and buy an existing franchise business?

The key to solving the new versus existing franchise dilemma is to understand the opportunities and challenges before you make any decisions. By thoroughly evaluating the pros and cons of each approach, you can minimize the potential for nasty surprises and significantly improve the odds of success in franchising.

Advantages of an Existing Franchise

There is a general sense among buyers that acquiring an existing franchise is easier than launching a new franchise outlet. That may or may not be the case, depending on the specifics of the outlet, but it is true that existing franchises offer several advantages that are worth considering:

1. Track Record

An existing franchise opportunity can be a turnkey business acquisition. The business is already operational so the seller should be able to demonstrate a track record of profitability as well as hard numbers that will help you determine current cash flow and make better projections regarding future performance--two key elements in the value of the business.

2. Customer Base

An established and loyal customer base is a huge benefit for a new business owner. Existing franchises make it even easier for new owners to leverage the advantage of an established customer because the franchise brand gives customers a sense of consistency, even if an ownership transition has occurred behind the scenes.

3. Flexibility

Franchisors typically have a set fee structure for new franchise locations, limiting the buyer's ability to negotiate on terms or price. Buying an existing franchise, however, puts you directly across the table from the seller with more ability to negotiate the terms and maximize the return on your investment.

Advantages of a New Franchise

New franchise outlets have higher risks and, thus, potentially higher rewards. While every franchise opportunity is different, new franchisees often discover that building a new location from the ground up provides benefits that simply aren't available with an existing operation:

1. Clean Slate

A new franchise offers buyers a clean slate; a business opportunity unaffected by the habits, preferences and/or shortcomings of a previous owner. Although you'll have to work harder to establish your business in the community, you don't have to worry about the possibility of negative customer impressions haunting your business.

2. Lower Purchase Price

New franchises are often less expensive because you aren't buying existing cash flow from an established customer base and you aren't paying for "goodwill" value often expected by sellers of existing franchises. A business with a solid reputation and a strong customer following is clearly worth more than one that is just getting off the ground. If the new franchise is successful, you'll be the beneficiary of the company's goodwill value--not the seller.

3. Newer Equipment and Facilities

When you buy a new franchise, it's likely that your equipment and facilities will also be new or at least newer than they would be if you bought an existing franchise. Outdated equipment isn't always a deal-breaker, but in some sectors (e.g. food service franchising) it's important to make sure the business is outfitted with reliable machines and the latest designs.

Ultimately, the decision to buy a new or existing franchise boils down to your personality, preferences and risk threshold. In general, proven franchises are a safer investment, but if the idea of breaking ground in a new franchise area doesn't faze you (or even appeals to you), then a new franchise might be a better option.

To be honest, there's no right or wrong answer to the new versus existing franchise dilemma. Both approaches have benefits and drawbacks.

Curtis Kroeker is group general manager for BizBuySell.com and BizQuest.com, the Internet's largest and most heavily trafficked business-for-sale marketplaces. BizBuySell.com currently has more than 910,000 monthly visits. @BizBuySell