Why Buy An Existing Franchise Business 

In today’s hyper competitive economy buying an existing or established franchise business can offer an individual a number of distinct advantages, and often sometimes an even greater chance of success versus launching a new franchise business. In some cases these advantages could ultimately make the difference between success and failure for the average entrepreneur. Below you will find a list of some of the major and more obvious potential advantages of investing in an established snap fitness franchise business. This would include a verifiable track record, lower investment, established customers, current income, and generally a lower risk of failure.  

Track Record & History:

When you buy an existing franchise business you have the advantage of being able to review and validate detailed past financial records that can help demonstrate whether the target business is ultimately a good investment or not. With a new franchise opportunity in most cases you are relying solely on potential sales projections provided by the franchise company based on demographics and how other established units are performing. In short, having the ability to see actual yearly sales volume, net income, and operating costs can greatly increase your chances of making a good investment decision.  

Potentially Lower Investment:

 In some cases it’s not unusual to be able to purchase an existing franchise business for much less than the initial costs of a start-up opportunity. This scenario is even more attractive when you consider that the business may already be well established and profitable.  

Established Customer Base:

 When you buy an existing franchise business you also have the benefit of a built in member base that has hopefully created a large reservoir of good will that will remain in place after the transfer to new ownership.  It’s comforting to know that the previous owner has already invested a lot of time and money to create a loyal clientele and subsequent revenue stream. This should theoretically allow you more time to concentrate on other aspects of the business. 

Current Income or Cash Flow:

 In general, the majority of new franchise businesses don’t start making a profit until their second year of operation. This can be challenging of course for the owner operator who may not have adequate working capital to meet his business and personal expenses in the interim. In most cases (if you have made a prudent purchase) with an existing and established franchise you can rely on a fairly predictable cash flow that should cover your expenses (including debt service) and allow you to make a profit. 

Easier To Finance:

Whether you are seeking bank financing or the owner is offering seller financing as part of the acquisition terms, you should in most case have a much easier time securing acceptable financing to buy an existing franchise. Lenders and Banks make no secret they prefer working with established businesses that can provide a detailed financial history of performance versus working with a start-up.  With seller financing you can negotiate and secure acceptable terms directly with the owner and avoid the headaches and restrictions associated with securing bank financing for an acquisition.

Less Risk:

Although buying a new franchise business is considered statistically much less risky than starting a non-franchised business from scratch, buying an existing franchise with an established track record is generally even less risky. Even new franchise locations occasionally fail for a myriad of reasons including under capitalization, fierce competition, or a poor location.  Existing franchise units on the other had that have been established 5 years or more and have overcome the obstacles that all new small businesses face generally have a very low rate of failure.  

Researching the Franchisor UFOC/FDD

What is a UFOC/FDD, Uniform Franchise Offering Circular / Franchise Disclosure Document?

The UFOC/FDD was a response to some unethical behavior in the 1960s and 1970s. Today franchises are regulated by law. The Federal Trade Commission (FTC) requires that certain information be disclosed to potential franchisees before a contract can be signed or any payment made. The information is presented to the prospective franchisee in the form of a document -- the UFOC/FDD.

Franchise Registration States

The FTC requires franchisors in every state to provide a UFOC/FDD. In addition, some states require that the offering must first be approved and registered by the state before it can be promoted to prospective franchise buyers. These states include: California, Hawaii, Illinois, Indiana, Maryland, Michigan, Minnesota, New York, North Dakota, Oregon, Rhode Island, South Dakota, Virginia, Washington, and Wisconsin. Certain states, such as Illinois and Minnesota, have even more stringent requirements for the franchisor. This in turn affords better protection for the prospective franchisee.

What Does the Franchise UFOC/FDD Contain?

The UFOC/FDD contains 23 items of information that must be current as of the completion of the franchisors most recent fiscal year. If there is a material change to the information in the document, the franchisor must make a revision (to be issued quarterly). The disclosure document must be given to a prospective franchisee at whichever occurs earlier: the first personal meeting of franchisor and prospective franchisee or ten working days prior to the execution of a contract or money payment to the franchisor.

Standard Registration Documents:
1. The Franchisor, It’s Predecessors And Affiliates
2. Business Experience
3. Litigation
4. Bankruptcy
5. Initial Franchise Fee
6. Other Fees
7. Initial Investment
8. Restrictions On Sources Of Products And Services
9. Franchisee’s Obligations
10. Financing
11. Franchisor’s Obligations
12. Territory
13. Trademarks
14. Patents, Copyrights and Proprietary Information
15. Obligation To Participate In The Actual Operation Of The Franchise Business
16. Restrictions On What The Franchisee May Sell
17. Renewal, Termination, Transfer And Dispute Resolution
18. Public Figures
19. Earnings Claims
20. List Of Outlets
21. Financial Statements
22. Contracts
23. Receipt

How Do I Use this Franchise Document?

The UFOC/FDD is similar to a securities prospectus. It can provide the information you need to evaluate a company or to target potential sales clients. An accredited franchise company, whether publicly traded or privately owned, must provide this disclosure document.

The UFOC/FDD is most valuable for potential franchisees, potential franchisors, franchisors, investors, financial companies and suppliers to franchisees.

Summary: Please keep in mind that all prospective business buyers should thoroughly investigate any franchise or business, obtain all appropriate disclosure documents available, and seek expert consultation prior to making any investment decisions.