Entrepreneurs that decide to buy and run an existing franchise receive plenty of great business benefits including name recognition, training, and support. But just like businesses that decide to take their companies and turn them into franchises, there's still no guarantee that your franchise will be successful.
In part two of our series on how to start up a franchise; we're focusing on buying into an existing franchise, like Subway or McDonald's, and owning the franchise. The Federal Trade Commission states that owners are responsible for running all aspects of the business including costs, contractual obligations, and franchisor controls. After you've invested your initial franchise fee payment, selected your franchise, reviewed the Franchise Disclosure Document, and signed the Franchise Agreement, then it's time to pick a legal structure to incorporate your franchise business.
What's the Best Entity to Form?
If you're seeking favorable tax treatment... Form an LLC. An LLC can help you separate your personal assets from those of the business and can also choose how it wants to be taxed. LLCs are treated as a "pass-through" entity with single taxation and may also be taxed as S-Corporations if they qualify.
If you're thinking about expanding to even more franchises... File your business as a Corporation. This legal structure offers liability protection, plus a formal business structure that potential investors can invest capital in and reduce potential audit risk. Franchise owners may also find it necessary to file for a DBA or Doing Business As name to ensure that their business may be conducted under the franchise name.
Why Your Franchise Needs This Legal Structure
In 2020, franchise businesses were forecasted to represent 4.5% of the U. S. GDP. With so many businesses finding lasting success, the future has never been brighter for franchises! However, if you don't incorporate or form an LLC your franchise may be subject to legal issues and unable to establish immediate credibility with consumers.
Additionally, an easy rookie mistake to avoid making is to incorporate or form an LLC in the state where your business is located rather than where the franchise is headquartered. Incorporate today! Form an LLC with the help of our experts who make it easy to file your documents so you can continue putting your heart and soul into the franchise.
Benefits of Buying an Existing Franchise Business
Buying an existing franchise business offers a faster path to profitability, since the brand is already established and customers are familiar with the location. Existing franchises for sale often come with trained staff, existing equipment, and an operational history, making it easier to step into day-to-day management with less guesswork.
What's the Best Entity to Form When Buying an Existing Franchise?
Most franchise buyers choose to form an LLC or corporation to limit personal liability and separate business and personal assets. The right entity can also offer tax flexibility and help establish credibility with the franchisor and lenders. Always review the franchise agreement and speak with a professional to confirm which structure makes the most sense for your situation.
Why Buying an Existing Franchise Requires the Right Legal Structure
When you buy an existing franchise, the right legal structure protects you from risks tied to the business's past operations. It also defines how ownership is shared if you have partners, and how taxes are managed. Choosing a strong legal foundation ensures a smoother transfer process and long-term stability.
What to Consider Before Buying an Existing Franchise
If you're planning to buy an existing franchise, there's more to think about than just location and profit. Buying an existing franchise business means evaluating legal terms, financial records, and the health of the relationship between the franchisor and current franchisee. Doing your due diligence before making a deal is key to long-term success.
Speak with a Franchise Consultant
Franchise consultants can help you assess available opportunities and point out red flags you might miss. They bring experience, industry insight, and can guide you through each step of the buying process. This can save you time and prevent costly mistakes.
Understand the Franchise Disclosure Document (FDD)
The FDD outlines the franchisor's background, fees, obligations, and legal history. Reading and understanding this document is critical before buying an existing franchise. It helps you know exactly what you're committing to and where the risks might lie.
Review Transfer Requirements
Most franchisors have specific rules for transferring ownership, including fees and required approvals. You'll need to meet these terms before completing the purchase. Understanding the transfer process early can help you avoid delays or surprises.
Determine Business Value & Review Financial History
Ask for financial records going back several years to assess the business's performance. You'll want to understand revenue trends, expenses, and any existing debt. An accurate valuation ensures you're not overpaying for the franchise.
Inquire About the Current Franchisee & Franchisor
Understanding why the current owner is selling can give you important context. Ask about their relationship with the franchisor and whether they felt supported. This can give you a clearer picture of what to expect once you take over.
Evaluate the Level of Franchise Support
Not all franchise systems offer the same level of training, marketing, or operational support. Make sure you're joining a franchise that provides the help you need. This is especially important if you're new to owning a business.
Discover How the Franchise Location is Perceived
Look into how the local community views the business. Are reviews positive? Is there steady foot traffic? The reputation of the location you're buying can heavily influence your future success.
Employ Professional Help
Consider working with a business attorney, accountant, or broker who specializes in franchise sales. They can help review legal documents, verify financials, and ensure the deal is structured fairly. Having expert support gives you confidence in your decision.
Negotiate the Purchase Price
The listed price isn't always the final price. Use the financial data, market research, and any needed upgrades to negotiate a fair deal. Don't be afraid to walk away if something doesn't feel right.
Sign Transfer Agreement
Once everything checks out, you'll sign a transfer agreement that formalizes the change in ownership. This step may also include final franchisor approval. Make sure you understand every part of the agreement before signing.
Get Ready to Buy an Existing Franchise or Business
Buying an existing franchise business is a major decision, but the right preparation makes all the difference. If you're learning how to buy an existing franchise, start by doing your research, asking the right questions, and surrounding yourself with professional guidance. A solid plan will put you in a strong position to succeed.
