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New Franchise or Franchise resale? Pros & Cons For 2024
Written by: Patrick Findaro
Last Updated by
Rocio Somoza: January 23, 2023
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Download NowAre you thinking about buying an existing franchise or starting one from zero? Have you evaluated all franchises in your area that might be for sale before you sign and ink with that new franchise concept that is growing rapidly across the United States, but is new to your area? In today’s article, we’re going to go through some of the pros and cons to opening a franchise from zero versus buying an existing franchise.
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Pros of opening a new franchise
So, first, why would it be nice to open a franchise from zero? You can choose the ideal location, neighborhood. You can choose the location that really suits your lifestyle purposes and not have to buy an existing franchise that might be 30, 60 minutes away far from your kid’s school, far from your community. So, with a new franchise that you’re starting from zero, you have a lot of choices. There’s a lot more franchise opportunities that you could open up and start a franchise from zero.
If I’m looking here in Miami-Dade County, there might be 500 franchises that have resale opportunities right now, September, 2022. However, there’s about 3000 franchises, new franchise concepts, that I could open up a new location here in Miami-Dade County. So, if you’re going to open up a new location, a new franchise, there’s going to be a lot more opportunities to select from and you can really have it be your baby, where you choose the location, you choose the manager, the staff, and everything.
Cons of opening a new franchise
Now, some of the cons, you’re starting everything from zero. You have to choose the site, work with a reputable broker, go through the permitting process, where here in Miami-Dade could take you 12 months to get the permits just to open up a smoothie franchise or a restaurant business. Maybe six months, nine months, if it’s going to be a haircut business or pet grooming business.
So, it’s going to take time to find the site, build it out, get the permits, allow the potential customers to be aware that you even exist in the market. This is significant time for you to even start to make money, break even, and then start to actually get $5,000 a month, $10,000 a month to pay yourself and help sustain your family.
A big con with a new franchise is the uncertainty. Some franchise you know more than others, but there’s always going to be, hey, is it eight months to break even, three months to break even, six months to break even? Usually going to be kind of an expected range, but it’s not an exact science, so that uncertainty in the time it takes to break even.
The importance of knowing what you are working with
Pros with resales are a lot of the kind of feed in from the cons that I mentioned from starting a business from scratch, but you generally know what you’re getting into. You have the financials, usually for the prior three years. You’re working with your CPA accountant to reconcile and make sure those financials are actually fairly stated and there might be an opportunity to continue to expand and maybe the person that’s selling that one franchise location, or couple franchise locations, has the rights to open up another three.
So, you kind of have that roadmap that you can continue to build the business. And with the resale, you don’t have to work for free for 12 months, 18 months before you start making money from the business. You’re able to get money in theory from day one, if it’s a profitable business.
You got to make sure there's enough working capital for three months, four months to sustain the business costs, but after you have that money that's being put to work paying employees, vendors, et cetera, from the business, it's pretty predictable.
Investing on a resale franchise
Why everyone should explore franchise resale even if there’s not a franchise resale that is in your territory for a new franchise concept that you’re thinking about opening and where you live is you want to know how much the resale value is to the initial investment cost to open up a business. So, say Subway.
Subway’s existing franchises
We recently did a video on the Subway franchise and finding different franchise resale opportunities through bizbuysell.com. And Subway franchise might cost 180K to 500K to open, but the resells are 100 to 150K.
If you’re buying an existing franchise of Subway and you’re happy with the numbers, you can work all in on the business. You invest 100k, you make 70 to 80K from that business. You’re happy working 30, 40, 50 hours a week in that business with little prospect to grow, then that can be good. Depending on what your financial goals are and where you are in your career, that can be a good option for you.
Subway’s new franchises
However, if you’re looking to start a Subway, invest $300,000, and the prospect is you working full-time and there’s no room for a general manager making 80K, that’s not a good deal because you can’t sell that for more than 100, 150K because without there being enough margin to have a full-time general manager, at least the new owner working less hours, the multiple on the owner’s compensation’s going to be less than three times, less than two times, and that is when it’s difficult to get your initial investment cost back.
So, if it costs $300,000 to open a Subway and Subways are trading at one times, two times, three times max what the owners are making from the business, it’s going to be difficult to recoup that initial investment cost. And that’s why everyone should at least look at the resale opportunities available in your area for franchises in the industry that you’re exploring as well as resales nationally for that particular franchise opportunity that you’re looking at. In a big way, you can contact former franchise owners.
Resale franchises
And for resales, you can always pick up the phone and, as you’re investigating a franchise, third out there, “Have you ever considered selling? Would you sell for the right price?” So, some of the best deals that are done on the business for sale market are not franchises, not businesses that are listed for sale, but it’s the prospective buyer that reaches out sometimes through an introduction or a cold call and sees if fits a franchise resale opportunity.
And it’s a bit of an art in terms of how you approach that prospective franchisee as they could have their guard up or they could have their guard lower down and be more open to share some initial financials before signing an NDA and going through a more formal process.
Conclusion
So, opening a new franchise has its benefits. It’s your baby. You can make sure everything’s how you like it. And then the big advantage of the resell is the certainty in terms of when you start making money, which should be immediately after you make sure there’s enough working capital in the business that you’re buying, and the opportunity to potentially expand from at least a client base and some customers that know the business in your local area. If it’s property management resale, you can definitely expand and continue to grow in most cases.
Those resale opportunities where it’s more buy-yourself-a-job and there’s no opportunity to kind of expand and make a lot more money and hire a manager, open up multiple locations, just know that going into it and it should be pretty clear especially of how the business is priced. And if it’s being priced at one times earnings, two times seller discretionary earnings, it’s probably kind of more of a buy-yourself-a-job type opportunity. So, definitely explore both, especially if you’re beginning of the process of opening a new franchise or buying an existing franchise.
