The Pros and Cons of Buying a Franchise
You are ready to become a business owner, but believe you lack the capital, time or resources to create and grow a brand new company from the ground up.
Purchasing an existing franchise may be a great solution for you because it would cost you less than starting from scratch, resources would be readily available to you and everyone already knows your brand. Plus, it can take years for new businesses to start turning a profit, whereas a franchise can start returning profits more quickly.
Like anything else, there are pros and cons of buying a franchise. It is a major decision and should not be taken lightly.
A Foundation for Success
When you are the founder of a start-up, every element of the business rests on your shoulders. You are responsible for everything including hiring and training employees, signing contracts with vendors and picking out a site and obtaining the proper building permits. These are just a few of the seemingly endless items you must handle.
An existing franchise, however, already has a system in place – a foundation for success is one of the major benefits. Now, you may ultimately decide to make some changes for the sake of your own franchise, but you are starting with something instead of nothing. Keep in mind, since it is a franchise, you will be limited on the actual changes you can make to stay in line with your contract.
Data Makes Discovery Easier
Company history is one of the pros and cons of buying a franchise. When a business is established, it comes with a wealth of data you can use to figure out if it is a wise investment and how much potential it has for future growth and success. This benefit will help you to analyze its performance via the books to determine if it is solvent and if keeping it profitable is something you can manage.
A new business, on the other hand, requires quite a bit of guessing and projecting to predict whether or not it could survive and thrive. A franchise that has a history provides you with real numbers to make educated, informed projections.
Since most existing companies already have employees, customers and processes, it is possible that you could see cash flow on the very first day of operation after you take ownership.
And it is not just the revenue that is a gratifying benefit. A franchise is only as successful as its franchisees. Based on this fact, business savvy franchisors will do everything in their power to ensure that each and every franchisee runs a thriving business, and that includes providing them with the support and assistance they need.
The typical franchise is also a turnkey operation, with all of the supplies, equipment and marketing materials at the new owner’s disposal.
The main drawback of buying a franchise – and it really is more of a consideration than a con – is the need to remain grounded despite how easy running an existing business may seem at first.
While there is a history of the company at your disposal during the decision-making process, it is critical to take your research a step further and think about why the owner is selling. Is the location detrimental for business? Is the franchisor unsupportive or just plain bad at business? Has the industry been on a steady decline? All of these situations could make it difficult or nearly impossible to make the franchise profitable.
Also be aware that the franchisor may require you to bring the location up to current standards, and on your own dime. If this is the case, you need to factor the cost of doing so into the total purchase price. A legitimate franchisor will be upfront about their expectations.
There are tax benefits of owning a franchise as well.
While the initial franchise fee may seem burdensome, it is actually tax deductible under certain circumstances, because the IRS categorizes it as a start-up cost. Training and travel expenses directly related to your business may also be tax deductible.
The tax outlook for franchisees further improved when the Tax Cuts and Jobs Act (TCJA) went into effect at the beginning of 2018. The new 20% tax deduction for pass-through businesses will have an estimated annual tax savings of $2.5 billion to the franchise community, according to the International Franchise Association.
Financing for Franchise Success
ICA has been at the forefront of small business funding for over 25 years. Our leadership possesses extensive experience in orchestrating effective financial solutions. We also work with our national network of over 50 lenders to ensure our franchise loan program meet our clients’ specific needs.
You will enjoy the following advantages with our franchise financing program:
- Fast pre-qualification process, closing and commitments
- Rates as low as 6%
- Extra cash for working capital
- Up to 25-year terms
- No prepayment penalties