What is the pros and cons of acquiring a franchise business?

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September 03, 2020

by a searcher from The University of Chicago - Booth School of Business in New York, NY, USA

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Reply by a searcher
from Campbell University in Emerald Isle, NC 28594, USA
During my 2-year self-funded search several years back I came across a few existing franchises for sale that were some of the best performing in their industry but weren't appealing enough as investments. Two of the franchises were in the process of mandatory "improvements" to their brick and mortar spaces with hefty cost. Such improvements were a major turnoff to the already unattractive financials.

The business I ended up buying has had far superior economics when compared to ones that have to pay high franchise fees, advertising cost, etc., that are enforced by the franchise.

If you come across a non-franchise business that has very low (or none) advertising expenses, well established and durable, and puts other similar franchise businesses to shame as far as customer loyalty and satisfaction, then buy it as you will be happier due to higher margins and lower expenses and the added benefit to have the freedom to do what YOU want to do!
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Reply by a professional
from University of Maryland at College Park in Danville, CA, USA
If you're acquiring a franchisor business:

Pros:
- Theoretically highly scalable
- Excellent valuation arbitrage opportunities
- Outstanding recurring revenue

Cons:
- Finding new franchisees is a slog and not a core skill for many franchisors (many rely on third-party sales firms to help here)
- Subject to sometimes complex and varying regulatory requirements

If you're acquiring a franchisee business, the pros and cons change substantially. Good luck! Happy to discuss further if helpful.
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