Buying an Existing Business or Franchise

Sometimes it is easier to buy an established business rather than start a new business from scratch. About 10 percent of new business owners have purchased an existing business.

If you’re looking into buying an existing business, find out why it’s for sale. This can be a challenge of its own. Is it for sale because it is not successful? Was the seller doing it wrong? Were they doing it right? Was it a bad location, or a good location gone bad? Was the seller just bad at marketing? Is there an illness or retirement? You need to research, research, and research some more. Remember, you are looking into buying their “baby.” Don’t let their emotional status, or yours, detour you around making a smart judgment.

If you purchase a successful business, it will already have a clientele and financial records showing profits. Still, I would always seek professional help when determining if the business is worth the asking price. Look in your local telephone directory for business appraisers or consultants.

Avoid using a Certified Public Accountant to appraise a business. A CPA has to use the bookkeeping to legally appraise the business, and as most of us know, books are not always accurate. By using a professional business appraiser, you’ll be able to get past the bookkeeping and into the heart of the business. The cost of a professional business appraiser will depend on the size of the business, how good the financial records are, and simply the amount of work involved with the specific type of business.

There are three ways to successfully appraise a business, the assets, market, and income approach. With the asset approach, you look at what the assets are worth in today’s market. Look first at tangible items like inventory and store fixtures or office furniture. Then add value into non-tangible things like copyrights, patents, and goodwill. With the market approach, you look at what similar businesses sell for in your area. Finally, the income approach is the business’s net income before income taxes. Remember, you’re buying the cash flow of the business. Also, remember that some businesses are valued higher at certain seasonal times of the year.

After you’ve settled on the fair value, offer the seller no more than the fair value and include in the deal that the seller will work with you in the business for at least one month. If the seller doesn’t want to cooperate, pay attention; there may be a reason.

Only 2 percent of business owners have purchased a franchise business. There are benefits as well as negatives to buying a franchise business. There’s always a royalty payment associated with a franchise. You have to pay to get their name and expertise, but it can be equivalent to having entry into places that you couldn’t otherwise get into, i.e., shopping malls or busier locations. In addition to being able to get into better locations, a franchise is good because it gives you an opportunity to share in the corporate recourses that could otherwise be too expensive for you.

The downside to a franchise is that you don’t have as many independent choices on how to run your business in terms of the product that you’re going to sell in your store. You loose a certain amount of your independence. But in reality, if you’re in business to make money, then the only effective issue for you is the amount of profit at the end of the month. If you’re in it for your personal vanity and you want to have a place that’s “your place” and do everything that “you” want when you want to do it, go ahead and take that risk, but don’t buy a franchise. Franchises come with their own individual set of rules. Before you sign on the dotted line for a franchise, hire a legal adviser to overlook the contract.

There is another type of business that falls somewhere between independently operated and buying a franchise. It’s called a “dealer” store. You sign a contract with a distributor to sell their merchandise and receive a commission from them for the merchandise you sell. You take care of customers and promote the distributors products, services, and warranties. Under this type of contract you typically cannot sell any merchandise in your store that is not provided by your distributor. But you do not pay royalties like a franchise.

Be smart when looking at buying an existing business or franchise. Do your research to ensure the decision is in your best interest.

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