Buying New vs. Buying Existing?
With many larger franchises, the opportunity exists to buy an existing franchise OR build a new location in a new area. When presented the opportunity, you need to weigh all factors and then see which makes most sense.
Location – How is the location? How are the demographics? How are population trends in the area? Is there new development in the area to drive more traffic?
Timing – How long is the process to transfer the franchise over? Is the owner willing to train or does franchise offer that service? Is there an incremental cost for franchise training?
Valuation – What sort of multiple of cash flow is the business listed for? Is that number in-line with other asking prices? How motivated is the seller and is he willing to negotiate? Will he/she offer owner financing?
Franchise – What is the transfer process that the franchisor has laid out?
Location – Are locations available in your desired market? Are protected territories available for you to build multiple franchises in?
Timing – Do you have the patience and time to deal with building out a new store? Are you willing to deal with construction delays? What is your timeline?
Valuation – How much is the total cost to build out the franchise versus expected cash flow? What is that multiple (if you pay $500,000 for a franchise and its cash flow is $100,000, then the new franchise multiple is 5x)?
Franchise – What is the process one must go through to start a franchise? Generally speaking, how long does the franchise take to ramp up sales? Are you ready for zero income for 12 months?
There are a plethora of factors to analyze before deciding which route to take. Existing businesses may not even be available. For many franchises like McDonald’s and Burger King, you will rarely ever see them on the market. So in this case, building a new store makes more sense. If you plan on building an empire, you will likely want to start in a new territory that is protected (assuming the franchisor allows this). If your current location is important to you and there is a particular franchise for sale, then buying an existing franchise makes more sense. Moving the entire family can often times be a burdensome ordeal and buying existing is generally a much smoother and quicker process. Also, existing franchises have a much quicker transfer process than the time needed to open a new franchise.
Valuation can be tricky. For a new franchise, everything is estimated from build out costs to cash flows. So, the multiple you think you may be purchasing a new franchise for could be totally off whereas in an existing franchise, you can find out what sales were for the past 5 yrs (assuming it was open for that long). Also with an existing franchise, you know what the purchase price is since its exactly what the seller is asking for.
The risk and reward for each case are very important to analyze. There is no clear cut answer as every person will place a different degree of importance for each of the factors listed above. At the Hound, we prefer existing because we know what cash flows have been in the past so we can have a good understanding of where they will be in the future. We place a high importance on past results so we are willing to pay premium on build out costs. Take your time deciding and we hope you come to the right decision!