New Franchise vs. Resale - Escape the Corporate Trap!

Should you buy an existing business or start fresh? 

In this full episode, Giuseppe Grammatico breaks down the "Three Times Earnings" myth and how we help candidates navigate the hunt for semi-passive franchise ownership. Escape the corporate race at https://ggthefranchiseguide.com. 

DISCLAIMER: The information on this site is for general information purposes only. Franchising involves risk and careful consideration should be given before making any decisions.

00:00 Introduction: New vs. Resale Franchise
00:34 Welcome to the Franchise Freedom Podcast
01:27 Pros and Cons of New Franchises
02:54 Evaluating Franchise Resales
04:25 Financial Considerations for Resales
07:00 Challenges and Opportunities in Franchise Resales
11:25 Conclusion and Final Thoughts
11:55 How to Get in Touch

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The Franchise Freedom: Discover Your New Path to Freedom Through Franchise Ownership, Book by Giuseppe Grammatico https://ggthefranchiseguide.com/book  or purchase directly on ...

Transcript

Giuseppe Grammatico 0:00

That's this idea of, should I buy a new franchise or should I look at a resale franchise? A lot of people want the resale because everything is set up and running, so maybe there's cash flow. The existing franchisee is netting 10,000 a month, so 120,000. take a look at all cash flows, but also consider a new franchise. Especially something service-based where you can launch in 90 days or less. You'll be surprised how quickly you can ramp up, much lower cost and maybe with the savings versus buying the resale, you can buy an additional one or two territories or locations to that business.

0:35

Welcome to the Franchise Freedom Podcast, where you can escape the corporate trap through franchise ownership. Here's your host, Giuseppe gr, the franchise guide.

Giuseppe Grammatico 0:49

Hey guys, welcome to the Franchise Freedom Podcast. I'm your host, Giuseppe Grammatico, your franchise guide. Very excited for our show today. This was a popular topic both at our conference in New Orleans as well as the past couple weeks since we've been back. That's this idea of, should I buy a new franchise or should I look at a resale franchise? And I wanted to tackle that topic today. Definitely some pros and cons. We wanted to cover that on the resale side, but in order to, uh, kick this show off, wanted to start off with, you know, what a new franchise would look like, and then we will go into what a resale looks like from the standpoint of purchase and due diligence and things like that. So, new franchise. When you're looking at a new franchise, our process remains the same, right? We are looking for the characteristics in the business. We're looking for the match. We're looking for your role in the business. What's the transferable skill set? The soft skills that you're bringing to the table may be sales, it may be networking, it may be management, it may be operations, whatever the case may be. We still wanna find you that match. So nothing changes there. We'll look at territory availability. We're gonna make sure the investment's in line, do you have staff? Are they W2, 10 99, brick and mortar, versus something service-based, something maybe home-based. We're still gonna look at all that now. When you are looking at a new franchise, you know you want to find out, right? There's no exact answer, but we wanna look at scale. What's the total investment? The item seven, and how quickly can I get open and start scaling this business of profitability? And you'll have the ability to speak with existing franchisees and really pick their brain, right? Ask them the questions of how long it took'em to get up and running. What was that cost and how long did it take to get to profitability? They may be coming back to you with, took me a year, but if I had to do it all over again, I'd eliminate X, Y, and Z. Or I'd do things differently. And that could significantly scale back on that timeframe. So that's why it is great regardless if you move forward with the brand or not, to speak with franchise owners cause you get to kind of hear the inside information of how things work, advice and things like that. So, plenty of advantages there. Now, when you're looking at a franchise resale, you're doing the exact same due diligence as I mentioned, you're looking for the ideal fit. You're also gonna be speaking directly with the franchisor. So however you found that resale, franchisor wants to make sure you're a good fit for their brand, so that you understand what the role of the franchise owner is. What the agreement looks like what you get from a support standpoint for the royalty. Nothing changes there. You're still getting approved by the franchisor. Now, when looking at a resale, I'll be honest, they're very hard to find good franchise resales. Simply put, it's usually the existing franchisees that are buying and selling to one another is a common theme. I am not saying you can't find a franchise resale online, but typically franchise owners looking to sell something has come up. They are getting a divorce or having to move or retiring. They're gonna naturally go back and speak with the neighboring franchisees and, that way you have some major advantages. Number one is that, you don't have to pay a broker fee in order to sell the business. And number two, the learning curve for the person buying the business is gonna be minimal. Getting them up to speed with your staff and if there are any opportunity issues, that kind of deal. But for the most part, they already know the business because they're running their own territory or their own location. There's some advantages, but again, in order to get access to a lot of these resales, you're gonna have to be an existing franchisee or you're going to sites like BizBuySell trying to figure out, okay, are the numbers accurate? And kind of doing a deep dive and still having to meet with the franchisor. A lot of people want the resale because everything is set up and running, so maybe there's cash flow. The existing franchisee is netting 10,000 a month, so 120,000. Also, a key mistake I see a lot of people make when looking at resales is that they forget to factor in the loan payment. So the person selling the business may be debt free. They may be netting 10,000 a month, but what does that mean to you? Just to keep the numbers simple, if they're netting, uh, 120,000 a month and they're selling at a three multiple, that's 360,000. So you're paying three times earnings. So three years. If you're lucky, sometimes we've seen'em as high as four and five and beyond, but you're paying three years in advance for the ability to have that cash flow. So that 120,000, you know, assuming every customer stays on, now you have to factor in: if taking a loan, what is that note payment gonna be? Just to make, you know, make things simple. If that note payment is$5,000 a month, all in with, uh, with interest, your cashflow is not 120,000. It's only 60,000 because you're factoring in the loan that you had. The previous owner didn't have maybe they had originally, but they had paid it off. That one 20 net ends up being less because you have your notes. So you have to factor that in. You wanna make sure it's something that works specifically for you on a$60,000 estimate of what you may be pulling out, assuming every customer stays on, but also assuming no growth. Things to consider and that is one of the major areas that I see being missed is that the buyer thinks they're gonna get the exact cashflow for getting about the loan or assuming that the owner had a loan and, they may have a loan as well. But you wanna factor in the numbers for you with between interest rates, what you have to put down as a down payment, making sure you have those cash reserves. Hey guys. Thanks for listening. I hope you're enjoying the show. As a thank you for being a valued listener, wanted to offer you a free copy of my book, franchise Freedom. This book was written back in 2020, and it's my exact blueprint in helping you find that perfect franchise. I wrote it based off my experiences and wanted to pass that along to you. Wanna chat today? You could book a call directly on our website. Top right. Side of that screen and you can schedule a 20 minute call. We'll dive into if a franchise is a good fit. I help you get qualified and figure out what that perfect franchise match may be. So I hope you take me up on my offer. Once again, franchise Freedom. Download the book today for free or book a call with me directly, and we'll help you bypass all that information you find online. Most importantly, figuring out. If a franchise is the right fit, and then figuring out what that perfect franchise looks like. So thanks again for listening to the show and back to the show. All right, so we're going back to resales. What are the other things you have to consider? When looking at a franchise resale, what is the state of the business? My staff, are they gonna stay on? Are they happy with the business? Are they disgruntled? What's the situation with the staff? And is there anything that needs to be fixed there? Your clients, your customers, depending on what business line you're in. What are your Google reviews, social media reviews, you wanna take a look at that. Are there any outstanding jobs where maybe money was taken a deposit, or maybe paid in full and not completed? What does the community think of that business? Because if the business is being sold and, that previous owner did not do a good job in the community or it left a bad taste in people's mouths or something happened, some negative PR. You're gonna have to factor that in because that's gonna be really taking a step back and, uh, approaching this as, Hey, this is, uh, under new management and we've made some changes and it's gonna require you, which you would do anyway, but really spending time calling every customer and equally as important, every past customer, letting them know that you're the new owner. If there's anything you can do, how to get their business back, how to continue with the services. So these are things to, to really consider. But, um, you know, going back to the multiples three, four, you know, up to five time multiple, you're really paying for the next 60 months of profit. For the benefit of some cash flow, does it make sense to for something generating 120,000, paying that 360 or paying that$600,000 upfront? Maybe the franchise fee and the first three months is only gonna cost you a hundred, 150,000 all in. Again, this all depends on the brand, and you could take it upon yourself to work really hard and create that multiple so that that multiple goes to you. So you know, you're getting launched relatively quickly if it's a non brick and mortar franchise, typically 90 days or less. So the ramp up, just like you know, you're gonna need some ramp up with an existing business, you're gonna have to go to training. You're gonna spend a lot longer on due diligence and half the amount of time you can get up and running with a new franchise because the due diligence is straightforward. You're not looking at existing books and customers, you're just really meeting with the franchisor and franchisees across the system. So my argument is that you can always launch the business in a quicker time period. Start from scratch, start cleaner and then start generating that multiple on a much lower investment. Which means less risk, less out of pocket, you know, a lower monthly payment if you're funding this through the SBA. And why not pay yourself at some point in time you decide to sell the business in five or 10 years. Get that 3, 4, 5, whatever that multiple looks like, so that you can pay yourself and make that money while just owning the business, but on the exit. So I challenge everyone to kind of, you know, think about existing cash flow, and realistically, what does that look like from a pure cash flow after loan payment? What does it really look like? What type of premium are you paying? Is it worth to pay for the next 3, 4, 5 years in advance for what the business is doing now? You can make a much lower investment in the business and make it yours, clean slate. And not have to deal with any outstanding headaches so that you can ramp up that business and sell it for whatever multiple is appropriate for your industry, length of time in business, and the amount of volume.'Cause you wanna obviously be showing some growth year over year while having those systems in place. You're not in the business full time or, you know, as they jokingly say, working a hundred hours a week. Those are some things to consider. So think about that next time you're looking at a resale. I will say I spent years and years, initially looking for resales, I just couldn't find anything. A lot of the resales, the numbers, never seemed to match up or there was cash involved, or they took this expense when it really wasn't. Just having a very hard time sifting through the information gathered. I'm not saying there, there's not some awesome resells out there. Sometimes there is, uh, what we call a fire sale. Someone just has to sell for whatever reason, and sometimes there are some great deals out there where the multiples come down to be significantly less. But, um, you know, you're going through someone else's books. You're taking their word on the accuracy, and you can only do so much due diligence. So definitely, you know, when you're considering a resale, my advice if I had to summarize is take a look at all cash flows, but also consider a new franchise. Especially something service-based where you can launch in 90 days or less. You'll be surprised how quickly you can ramp up, much lower cost and maybe with the savings versus buying the resale, you can buy an additional one or two territories or locations to that business. So you're really locking in what I call the future expansion of the business without having to worry about someone else buying those nearby territory. I hope this was helpful. I'm keeping these short and sweet, based off of feedback. This is another takeaway and conversation around the conference and I've received a few phone calls. I had two individuals that were on BizBuySell, a great website for resales and just couldn't find what they were looking for so we are now looking at a new franchise. We got very clear on the franchise model. And we're looking for those businesses that could do well in their specific markets that could be run accordingly based off the hours they could put into the business. Thanks for your feedback. Thanks for your comments. If there's any questions on this, I could dive specifically for your situation or if you wanna compare a resale you're looking at to a new franchise, go to the website, ggthefranchiseguide.com. Top right. Book a call with me. There's never a cause for our services, and we'll do a side-by-side comparison. More than glad to walk you through that. Answer any questions, see if a resale makes, uh, sense for you or not. We'll definitely do a side-by-side comparison. And if you have any questions or have any other topics you'd like for us to review, leave us a comment. The best way is right on the website because it hits my email box. I check it every day. Again, ggthefranchise guide.com just launched a newer version of the site. We cleaned it Got a lot of great episodes, a little bit easier to search for a specific topic. There's gonna be a section on there if you're not ready for a conversation. Click on contact me and you can send me a message directly. Make sure your email and phone number are there and I'll make sure to reach out, set up a call or answer the best I can. So again, thanks guys for listening in. We will talk to you guys soon. See ya.

12:54

Thanks for tuning in if you want to learn how to make the transition from corporate to owning your franchise. Join Giuseppe on the next episode. You can also follow on all social media platforms and achieve financial and time freedom today.