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Starting a business from scratch may be too much risk for some people, but taking the reins of an operating franchise or buying a non-franchise business may have some appeal. So, what does a buyer look for when buying an existing franchise? First, franchises are for a specific term, normally ten years with additional five year options. With each renewal term there is a renewal fee. This may be a percent of the current fee. So if you purchase a franchise in year eight of a ten year agreement, you can factor in the renewal fee into the cost of the business.

What if the franchisor does not renew the franchise at the end of the franchise term? If the franchise is operating as it should, then the franchisor must renew the agreement. The franchisor can not unreasonably withhold renewal. At the end of a franchise term there may be some requirements for renewal, for instance, with retail and restaurant franchises, they may require updating or modernizing the décor or purchasing new computers and software. Franchisors are in the business of franchising and in most cases have no interest in taking over your franchise. They know a franchisee does a better job of operating the business in their market…that's franchising.

What are the advantages of owning an existing franchise over a non-franchise business? Two important factors should be considered in weighing the decision of buying an existing franchise or a non-franchise business. One is equity potential. Franchise businesses usually command a premium over non-franchise businesess because of the branding and market dominance of franchises. The second factor is support. A franchise business with the systems and support will have a competitive advantage in the market place over non-franchise businesses.

How does the due diligence compare, franchise verses non-franchise business? The due diligence the buyer performs to make a decision to buy an existing franchise business is more comprehensive than a non-franchise business. The buyer can contact other franchise owners in other markets to gauge the performance of the franchise under consideration verses the performance of other franchise owners in the system. It is important to understand, are you buying a franchise from an underperformer or a top gun and what is the potential for improvement. With a non-franchise business, you have nothing to compare and it may be difficult to determine the level of sophistication of the owner and the potential for the non-franchise business.

How do royalties paid to the franchisor factor into the equation? Theoretically, any royalties paid to the franchisor should be outweighed by the benefits received by the franchise system. For new and emerging franchises, an argument can be made that the benefits are minimal. In a mature franchise system, the benefits are obvious.

How does the franchise relationship impact the decision to buy a franchise verses a non-franchise business? The franchise relationship between the franchisor and franchisee is a very important consideration. You must trust the vision of the franchisor to navigate the system through turbulent business waters. When buying a franchise, you must have trust in the Ray Krocs' and Dave Thomas' of the world because their decisions impact the value of your business.

Do I have to give up my freedom and creativity if I buy and franchise verses a non-franchise business? This is one of the big misperceptions in franchising, that if you own a franchise then you are part of the chain gang that slugs along producing profits for the franchisor. Nothing could be further from the truth. Talk to any successful franchise owner to understand they are operating THEIR business that is part of a system. OK, maybe they need to suck it in a bit and comply with Big Brother, but it's THEIR business. Buying an existing business you expect the owner to show you the ropes. At some point in time, enough is enough, it's time for you to forge your own path with nobody looking over your shoulder.

At the end of the day, you pay a premium buying an existing franchise or non-franchise business when the business is well run and producing predictable cash flow. What this premium buys you is peace of mind. You have bought a business with a level of risk that makes you comfortable, you are investing in the business and your future as a business owner!