This question is really more relevant to larger franchises, but it’s a question that must be given serious consideration. The simple fact is that there are advantages and disadvantages on both sides; however, the questions that you should be asking and the thought process is completely different from one side to the other. In this article, I’m going to give you the questions and the thought process you should be using when deciding whether to buy an existing franchise or build a new franchise.
If you are looking to buy an existing franchise, just understand that you will be fairly limited in the amount of choices you have because there aren’t as many available existing franchises as new franchise opportunities. But if you do have one you are looking at, the first consideration is to examine the location. Find out the current state of the location, find out the demographics and population trends in the area and find out if any new development is in the works that could drive more traffic to the location.
The next thing to examine with buying an existing franchise is the timing of the transaction. How long will it take to complete the transfer from the franchise owner to you? Will you get the training you require from the leaving franchisee or from the franchise company? Is the training included in the purchase price or is it an extra cost? When looking at the valuation, first ask what types of cash flow the franchise is listed for. Then identify if the valuation is similar or in-line with other asking prices of franchises for sale. Find out how motivated the seller is and if he’s willing to negotiate or consider owner financing. Finally, find out the exact transfer process the franchisor has in place so you completely understand the expectations of the entire transfer process.
Now if you are looking to buy a new franchise, you still look at location but you want to find out if there are locations available in your desired market if the franchise has territory restrictions. If there are protected territories, find out if you can build multiple franchises inside your protected territory. With regards to timing, you need to understand the potential timeline from building the franchise from scratch and decide if you are comfortable waiting that long. Are you comfortable with schedule delays, construction delays and setbacks because those are bound to happen?
When determining the valuation of a new franchise, it’s important to know the total cost of the build out versus the expected cash flow of the franchise. These are important numbers to know to find out when you could expect to get your money back from your investment. Then find out what the typical timeframe is to ramp up the sales and then decide if you could really afford to have zero income for up to a year because that could definitely be a possibility. There’s a ton of other factors that go into making an educated decision but this is a great start.
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