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Things to Consider When Buying a Struggling Franchise
If you're interested in buying a struggling franchise, these are some things you need to consider first. A struggling business can bring both risks and opportunities for a new owner. The biggest advantage of buying a struggling franchise is that they usually cost a lot less than a successful business. If you feel like you can turn the business around, then you may enjoy larger profits with less initial investment. However, you need to find out why the business is struggling.
Sometimes businesses struggle because they're in a bad location or because the franchise isn't particularly popular. It's unlikely that you'll be able to turn a business like this around. But if you think based on research that the business should be doing well but isn't, it may present an excellent opportunity. Businesses that should otherwise be successful can struggle for many reasons:
- The current owner may not be a good business person
- Long term Illness may make it difficult for the owner to successfully run their business
- The breakdown of a partnership may lead to difficulties running the business
I'm the owner of a business that was struggling. We did manage to turn it around and it's currently profitable. But it was a long and stressful process.
Opportunities with a Struggling Franchise
Before considering a struggling business, talk to other franchisees with the same company in the area. For example, if the struggling business is a Subway restaurant, find out how other Subway owners are doing in the surrounding area. Also, talk to owners of other businesses that are close to the business you're looking at. If they're all doing well, it may indicate that this would be a good turnaround business.
Struggling owners are often desperate to get rid of the business. They may be willing to sell it for a much lower price than it would otherwise be worth.
If the franchisor feels that you may be a good person to turn the business around, they may be willing to give you assistance. Find out what they may be willing to do for you, such as replacing some older equipment or paying for redecorating.
Talk to the landlord and explain that the business is not doing well. Ask if he or she may be willing to reduce the montly rent. A landlord may prefer to collect less rent than no rent at all if the business were to completely fail.
Some franchisors will lower the monthly franchise fee for a certain period of time if a franchisee can increase sales by a certain percentage each month. It may be easier to accomplish this if you're taking over a struggling business.
Risks and Problems with a Struggling Franchise
If the business hasn't been run well for a while, the business will likely have a bad reputation. This may include bad online reviews and complaints to the Better Business Bureau (BBB). You'll have to fix the reputation of the business. You may have to have a re-opening event and do other marketing to let potential customers know that there's a new owner and that customer service will improve. It may be difficult and take a long time to rebuild the business' reputation.
It will likely take some time for customers to come back to the business. Expect traffic to be slow for quite a while. You might lose money for the first several months after taking over. You should consider what this will cost you versus buying a more expensive franchise that's already profitable. The business we took over lost money for about six months.
If the business has been struggling for a long time, it's likely that equipment has not been upgraded for a while. Equipment breakdowns may be a problem. You should budget for this possibility in advance. Even when you start making a profit, a lot of it might go toward repairs and upgrades. This was the case with our business.
If you can't pay cash for the business, getting a loan may be difficult. You may also end up paying a higher interest rate.