Should You Buy an Existing Franchise?

Hint: You should Probably Seriously Consider It

Entrepreneurship can take many paths, from bootstrapped or venture capital backed startups, to franchises, to buying an existing business – but for some reason, buying an existing franchise seems to be taboo for many entrepreneurship through acquisition (ETA) folks. Luckily, the Acquiring Minds podcast had a panel of ETA experts who explored both the challenges and opportunities of buying an existing franchise.

What I Learned

A lot of aspiring ETAs, particularly newly-minted MBAs, overlook buying an existing franchise as a viable path. Their oversight is often attributed to several things: the stigma associated with buying a franchise (it’s not cool), the concern over a lack of contractual recurring revenue, limitations on growth due to franchisor regulations, and what’s perceived as labor-intensive operations. And it’s true the franchise path has its own hurdles, such as barriers to entry into certain franchise systems and potential limitations when it comes to franchise owner-operators selling the business. All these factors, combined with an absence of franchise entrepreneurship courses in most MBA programs, contribute to the hesitation among ETAs to pursue buying an existing franchise. 

Despite all the challenges, there are a few compelling reasons why an ETA might want to take a look at buying an existing franchise. First off, the franchise model offers a blend of entrepreneurship and structure; providing access to proven business models and processes that significantly reduce the risk of business failure. Here are a few key reasons you might want to consider:

Proven Business Model: As you know, franchises offer a turnkey approach to business, with established systems and protocols that have been tested and refined over time.

Stable and Predictable Cash Flows: While there probably won’t be contractual recurring revenue, a lot of franchises exhibit stable year-over-year sales, thanks to brand recognition and customer loyalty.

Opportunity for Growth through Acquisitions: The fragmented nature of many franchise systems is an opportunity for strategic acquisitions and expansion, particularly for the ETA looking to buy multi-unit operations.

National Brand Recognition: Franchisees benefit from the marketing power and brand recognition of the franchisor, which can be a significant advantage in attracting customers.

Community and Support: Franchise systems offer a network of fellow franchisees who can provide advice and support, fostering a collaborative environment for business growth.

Financing Advantages: Some banks offer special lending programs for franchisees, which can make financing the acquisition or expansion of a franchise more accessible.

No Need for a Groundbreaking Idea: Just like buying an existing profitable business, franchising allows entrepreneurs to build a business without the need to come up with a unique product or service concept.

You’ll need to conduct thorough due diligence, examine the Franchise Disclosure Document (FDD) and evaluate the unit economics, brand strength, and support systems of potential franchises. I think you’ll find franchising presents a viable and potentially lucrative path for entrepreneurs willing to leverage the structures and systems of established brands. Sure, it’s not the right choice for everyone, but it offers a unique blend of entrepreneurship and support that can lead to substantial business success.

If your still with me, and your ready to jump down the existing franchise ETA rabbit hole, here are a few things to think about:

Due Diligence Process: What specific aspects of the Franchise Disclosure Document (FDD) need to be scrutinized most carefully? Are there particular sections within the FDD that have historically presented red flags or significant insights into the franchise's operations and financial health?

Franchisee Support Systems: How do the support systems offered by franchisors vary, and what benchmarks should you use to evaluate the effectiveness of these systems?

Barriers to Entry: What are the most common barriers to entry into certain franchise systems you’re considering? Are there specific credentials that can make you a more appealing candidate to franchisors?

Growth Limitations: How does the franchisor you're considering limit growth? Can you find any innovative strategies other franchisees have employed to circumvent these limitations?

Financing Advantages: Are there examples of franchises that banks view more favorably?

Exit Strategies: Given the potential limitations on franchise owner-operators selling the business, will you be able to find a successful exit strategy?