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A resale business has existing customer base and cashflow, but a new franchise will be cheaper. Which is better?

At Franchise City we represent both resale businesses: franchises that have been operating for a while and the franchise owner is selling, and new franchises that you start from scratch. There is no right or wrong answer to which is better, it will depend on your situation. If you have the budget, a resale might make sense as you will be paying a premium for the business, as it has cash flow. Usually a resale franchise is sold for a multiple of their revenue, so for example if a business has a net profit of $100k a year, and it is selling for $250,000, that is a 2.5 multiple. Each industry has it’s own suggested multiple range.

Tip number one – if the business is cheap – there is probably a reason. We are asked this question all the time ” Robert this coffee shop, gas station, yogurt shop, cleaning company, etc. is selling for only $30,000…. is it a good deal? Well 99% of the time these low priced businesses are cash distressed. They aren’t making money.
Some businesses are easier to turn around than others, so it can be a deal if you know what to do. Some businesses are hard to turn around. A McDonalds franchise for example – there is not a much you can do to increase business as you are limited by walk-in traffic. But a printing business, consulting, commercial cleaning – you can get out there in the business community, start to network and proactively build the business. So depending on your skills, and the type of business — you need to ask first – is this a business where I can control the outcome? If so, do I have the skills to control the outcome? If yes, then a distressed resale might make sense.
Most of the time however, these are buyers with little to no money, hypnotized by the dream of being a business owner who spend $30,000 on a struggling coffee shop, lose all their money paying rent, employee salaries, advertising, then list the same business 6 months later to sell to the next buyer. Rinse and repeat.

Also remember in resale situations certain types of businesses do not have recurring revenue. A cleaning company for example, will come with customers that will continue using your service on a regular basis. A company like a painting franchise however, you work with a customer once and they don’t paint again for a number of years, so not much recurring revenue unless you have contracts with builders or contractors. Always ask about the customer base to determine this. Appliance repair – same thing- you fix the fridge and you have no idea when you will see that customer again. So ask yourself, does this business have recurring revenue, and existing customer base that I can benefit from or not. If not, you might be better off starting a new franchise from scratch.

Any business that is profitable, will not be for sale at $30,000 or $50,000 when the buyer started that business for $250,000. So most of the businesses you see at firesale prices are most often cash strapped. It can sometimes be easier to start a new franchise than to turn a failing business around. Why?

1. Negative reviews. usually these companies have dug themselves into a hole online which is hard to dig out of. It might make sense to start fresh.
2. Liability – we covered this before in our “buy a business for no money down video” Ill place that link above and at the end of the video. Buying an existing business you could end up owing the past debts of the business, or even be liable for future lawsuits. A new franchise does not have this risk.
3. Company culture. Usually these struggling businesses have very poor employee/employer relationships, which can be more difficult to transform, while a new business you build that culture from scratch.

If you do have the budget and can buy a *well-run* franchise or business – that can make sense. The staff is in place, ideally long term, their online reviews are good, and their customers are all happy. You just buy the business and walk into cash flow. BUT you will be paying a premium, so the equity you would have made by starting from scratch you will lose.

So there is no right or wrong answer, it will depend on your skills, your budget, the type of business and a number of other factors.