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


Franchises are you better off with a new or resale franchise?

November 20th, 2009

Many people want to buy a franchise.  Franchisors are always promoting new franchises because they get larger fees from a new franchise rather than the fee to transfer the ownership of a resale franchise to a new owner.  Many franchisors do not like to admit or talk that existing franchises are bought and sold.  To some franchisors, they have admitted to me that everyone pretends that they do not exist.  Based on the number of existing franchises sold, I would guess that more existing franchises may be sold than new franchises every year.

 

Are you better off with an existing franchise or a new franchise?  This will come back to my previous blog, location, location, location.  If there is a new subdivision and this is the only franchise store if its kind in the area, there may be instant traffic the minute the franchise opens.  If you are the first business in the location but the houses have not been built around the plaza, there may not be enough traffic to sustain your business or any business in the plaza.  You may be a few years too early to set up the business there and you may not have the working capital to wait until the traffic finally appears.

 

If you buy an existing franchise, you know the traffic to the location, you know the sales and the profitability.  You are paying for knowing that information and you are paying for someone else to take the risk to determine if this was a good location and building up the traffic.  As a result, the purchase price of a resale franchise may be more than an existing franchise.

 

Many franchisors have changed formats and now the new locations must include new brands, must be bigger etc.  As a result the cost of a new franchise may be several times that of an existing franchise.  Keep in mind, you are comparing apples and oranges.  For example Dairy Queen has many small franchises which sell ice cream from a small location and many of the old locations close down in the winter months.  Today, Dairy Queen wants you to not only sell ice cream but also to have the Brazier component to the franchise.  As a result, the price between a small stand alone franchise which is open 8 months of the year may be far less than the brand new format.  The return on investment may be more for the smaller location because there is less cash invested in that business than the new one. 

 

If you want a specific type of franchise and not is available except the new format, you may not have any choice but to buy the existing format of franchise.


Filed under: buying a franchise — Gary Landa @ 10:58 am


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