Is it Better to Buy an Established Small Business or a Franchise?
It’s no secret that I’m a big believer in the franchise business model when it’s done right; it would have been hard to stay in the space for nearly a decade now if I wasn’t!
But… I also know the importance of remaining objective, which is why I think it’s important to address a question that I get on a somewhat regular basis:
Is it better to buy an established business or a franchise?
If you have an interest in business ownership and spend any amount of time on social media, you’ve undoubtedly seen advertisements or reels from gurus talking about how to buy an established business from baby boomers who are looking to retire and it sounds compelling.
But is that the best path into business ownership for you?
You’ll have to answer that question for yourself but let’s look at some of the key advantages and disadvantages of both starting with a franchise and starting with an established business.
Franchise
Starting with the basics, a franchise is a business model where one party (the franchisee) buys the right to use another company’s (the franchisor’s) brand, business systems, and products to run a business. Think of this as a “business in a box” where you have the proven play-by-play instructions, training and ongoing support needed to launch and grow a successful business.
Some key advantages of the franchise business model:
Proven Business Model: a good franchise system is going to have established operational procedures and a tested concept, along with extensive initial training and ongoing support around areas like operations and marketing.
Brand Recognition: not every franchise is going to have the immediate consumer brand recognition of concepts like McDonalds but there are other -less direct- ways that franchisees are able to leverage the strength of the brand. Take an example from my days in a commercial cleaning franchise brand; when a new owner would launch their business, they were starting from scratch. In the commercial cleaning industry, customer testimonials go a long way in the sales process for new customers which can create a “chicken or the egg” scenario for businesses just starting out. The benefit of joining a franchise in this space was being able to leverage customer testimonials from other franchise locations in the sales process; from the customer perspective, they were dealing with an experienced and professional organization versus a new startup in search of their first customer.
Training and Support: if you’re a first time business owner or even an experienced business owner looking to launch into a new industry, the learning curve can be steep. With a franchise, the playbook is already in place and the franchisor will have training programs to turn you (as the franchisee) into a subject matter expert. This drastically reduces the learning curve and allows you as the owner to focus on execution.
Marketing and Advertising: if you want to stay in business, you’re going to need customers. Who is your target market and how do you gain their attention? Many franchisors will have marketing systems in place that are “plug-and-play”, meaning you (as the franchisee) are responsible for your marketing budget but you’re not having to figure out where to advertise or what types of marketing campaigns are most effective. You are able to tap into what has been proven to work and also benefit from ongoing innovation that is learned at the organization level rather than having to stay up to date on all of the latest trends.
Some of the drawbacks of franchising:
Ongoing Fees: every franchise is going to have ongoing fees, called royalties, that the franchisee pays to the franchisor. These are typically a set percentage of the gross sales and can reduce profitability compared to an independent business. The royalties are how the franchisor makes their money and also what allows the franchisor to provide ongoing support. Understanding these royalties and the value you (as the franchisee) receive from the franchisor is critical. In many cases, the value provided by the franchisor well exceeds the cost of the royalties, which is what you want to see. Personal example: I worked with a quick-lube (oil change) franchise brand in the past that had arranged significant vendor discounts on bulk oil for their franchisees. The cost savings to the franchisee compared to what an independent business would have paid for the same oil was enough to justify the royalty being paid.
Limited Autonomy: there are two sides to every coin and in the world of franchising, having more limitations is the tradeoff for standardized and proven systems. Consistency and uniformity are critical to success in franchising, so you need to be prepared to operate within the confines of the proven system; without this, the franchise runs the risk of the next bullet, Shared Reputation Risks.
Shared Reputation Risks: the system-view trumps all in franchising. If there is a neighboring franchisee in your system that is creating a poor customer experience, that can have ripple effects with your location based on perception that all locations are the same. This is why seeing certain restrictions or non-compliance related fees in a franchise agreement is actually a good thing. You want to make sure that the franchisor is protecting the reputation of the system, which in turn protects the equity you’re building in your business.
Let’s look at the other pathway you could take to business ownership.
Buying an Established Small Business
According to some sources, there are around 2.3 million small businesses owned by aging baby boomers preparing to retire at the time of this writing. That creates a lot of potential opportunity for those looking to purchase an existing business and take it to the next level.
Some key advantages of buying an established small business:
Independence and Flexibility: you have no confines that you are required to operate within and you have complete control over all decisions. If you want to change the service lineup, you can do it. If you want to change the color of the logo, you can do it. If you want to run offensive tv commercials, you can do it…. Alright, maybe you shouldn’t do that last one but you get the picture.
Existing Customer Base and Revenue Stream: this is by far the biggest advantage to buying an established business. There are already customers in place and revenue being generated, so you have the potential to have cash flow day one. You’ll want to vet this out heavily though; in some industries, the existing owner is the rainmaker and when they leave, their customer base will as well.
Some of the drawbacks to buying an established small business:
Higher Risk: an independent small business is less likely to have standardized systems and processes, which can increase your risk of failure and steepen your learning curve.
Limited Support and Training: you’re not going to get the same level of training and certainly not the same level of support that you would receive from a franchise. The support and training is going to be limited to whatever transition arrangement you work out with the seller. If you go the independent small business route, my advice would be to have the seller carry a note or have an earn out for a portion of the purchase price to keep them invested in the successful transition.
Potential Needs for Rebranding or Investment: if you buy “Kevins HVAC” and your name isn’t Kevin, you might need to consider rebranding the business, which can increase your investment needs. Also, if the business hasn’t made any updates to equipment or facilities, you might have to shell out additional cash for repairs and replacement.
Operational and Legal Complexities: the business landscape is always changing, from regulations to technology improvements to customer needs, it is not a static environment. This requires constantly staying on top of many different elements related to your industry and business in general. In a franchise environment, this is something that the franchisor should be doing much of the heavy lifting with but in an independent business, it’s all up to you as the owner.
So, which path is the better route to get started in business ownership? The answer to that question will be different for everyone but now you have some additional tools in your belt to help you decide what the best route for you is.
About the Author: Brandon Wilson is a Certified Franchise Executive (CFE) and franchise consultant with over 8 years of experience helping professionals transition into business ownership through franchising. Before consulting, Brandon held key roles in franchise development, contributing to the growth of 10 different franchise brands. Today, Brandon specializes in guiding mid-senior level professionals to identify franchise opportunities aligned with their goals, skills, and financial outlook. Passionate about providing alternatives to traditional corporate careers, Brandon brings a wealth of expertise and a personalized approach to every client journey.