This article are provided for information purposes only, and are not intended as legal advice.


Buying a franchise – do I look at a new or resale from the franchisor?

December 8th, 2009

If you decided that you want to buy a franchise, do you buy an existing franchise or a buy a new franchise?  There are many franchisors who own corporate stores and they sometimes decide to change their corporate policy and sell a corporate store.  Sometimes, these are franchises which have gone bankrupt and were repossessed by the franchisor, sometimes, the stores have always been corporate and never owned by a franchisee.

 

There are several advantages to buying a corporate store, the biggest advantage is that there is an existing traffic flow and revenue for the store.  Part of the question, does this location work has already been answered.  Sometimes, the store has just been set up so there is not a lot of history of the revenue from the store, others the store is several years old.

 

If the store has a track record, you can determine if the location is making or losing money.  If it is losing money, why?  Is it still in the start up phase?  is this a mature store?  If this is a mature store and it is losing money, maybe there is a problem with the location of the store.  If this is a start up and it has not reached the critical mass then you will still have to drive the sales in order to make it a viable location but at least you have a history and some indication of the business.

 

Be careful, some franchisors provide cash flow statements of what the revenue should be for a certain location of the revenue of a typical store. These may or may not be a good indication of the business that this store will generate.  If the location is a poor choice, the franchisor may just try to unload a store which has negative cash flow.  If the location is a good location and profitable, then there may have been a change in management or direction of the company to redeploy capital in other areas. 

 

Franchises, if they are not destination location, may or may not be profitable.  Some franchises pride themselves on never having closed a location.  But they do not tell you if any locations have gone bankrupt and been repossessed by the franchisor?  Some franchises make a lot of money, some are marginal, some lose money.  Is this because of a poor operator who did not follow the franchise format, is this because the location is bad or has the franchise got too many competitors and they are no longer the successful franchise that they once were?

 

Remember, master franchisors state that on average 10% of the franchises are run by poor franchisors.  Could that indicate that some of the corporate stores are under performing therefore under new management and ownership, they may flourish?  There could be duds and there could be excellent opportunities when corporate stores are sold.  Buyer beware and do your homework to determine if you want an existing store or a new franchise.


Filed under: buying a franchise — Gary Landa @ 11:19 am


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