Should You Franchise or Buy a Business? 3 Key Factors to First Consider

If you’re dreaming of becoming an entrepreneur, you’re likely considering two options: franchising or purchasing an existing business. While each option offers unique advantages, there are a few things to ponder before making your decision.

Here are three important factors to consider:

1. Know Your Budget and Investment Limits

Before diving into any business venture, it’s crucial to get clear on your finances. What can you afford—not just to buy, but to operate and grow the business? Evaluating your financial situation will help narrow down the list of potential franchises or businesses to those that fit your budget and long-term financial goals.

Franchise fees, equipment costs, staffing, inventory and working capital all add up. The clearer you are on what you’re willing and able to spend, the better your decision will be.

2. Be Honest About Your Skills and Lifestyle

Your strengths, experience and lifestyle preferences play a major role in determining the right fit. Are you someone who thrives with structure and support? A franchise could be ideal, offering training, systems and brand recognition. On the other hand, if you’re a confident business operator looking for more control and flexibility, purchasing an existing business might align better with your goals.

This step is about self-awareness. The right business choice should align with both your ambitions and the way you like to work.

3. Understand the Full Picture

Before signing on the dotted line, do your homework. Whether you’re buying a franchise or an independent business, it’s essential to fully understand what you’re getting into. That includes reviewing contracts, leases, inventory and current cash flow. Ask the tough questions. Get clarity on every operational and legal detail. The more you know up front, the fewer surprises you’ll face down the road.

Choosing the Right Opportunity

Once you’ve decided whether franchising or buying is the right path for you, it’s time to evaluate specific opportunities. This step is all about due diligence—digging deep to understand both the financials and the overall health of the business.

If You’re Exploring Franchising:

Here’s what to review:

• Franchise Disclosure Documents & Uniform Franchise Offering Circular: These documents contain important information about the franchise’s history, legal issues and financial performance.
• Franchise Terms: Make sure you understand your rights to use the name and trademark, your protected territory (if any) and whether you’ll receive marketing support and operational training.
• The Franchise Agreement: These contracts often favor the franchisor, so be sure to review them carefully. Look out for obligations such as mandatory supply purchases or sales quotas.

If You’re Buying an Existing Business:

Here’s what to consider:

• Licensing and Permits: Ensure the business has all the required local, state and federal permits—or prepare to obtain them yourself.
• Zoning and Environmental Compliance: Especially if you’re purchasing physical property, confirm that the business complies with all zoning and environmental regulations.
• Business Valuation: Understanding what the business is worth is key. Common valuation methods include:
  • Capitalized earnings approach – Refers to the return on the investment that an investor expects.
  • Excess earning method – Separates return on assets from other earnings.
  • Cash flow method – Used to determine how much of a loan the business’s cash flow can support.
  • Tangible assets (balance sheet) method – Values the business by the tangible assets.
  • Intangible assets valuation – Compares buying a wanted intangible asset versus creating it.

Each method gives a different perspective on the business’s value, so it’s often best to consult with an expert to determine a fair price.

Let Us Help You Make the Right Move Whether you’re buying a franchise or acquiring a business, financing is a critical part of the process. At Bank of New Hampshire, our experienced commercial banking team partners with businesses of all sizes to find the right financing to meet their unique needs. Ready to get started? Visit BNH.Bank to schedule an appointment.

Credit: U.S. Small Business Administration