What are the advantages and disadvantages of each option?
Many immigration attorneys and investment advisors agree that investing in a franchise is the most secure immigrant investment option for the EB-5, E-2 and L-1 visas. Leveraging an existing business model with support from an established franchisor increases your rate of success instead of starting a new business without a proven model. Prospective investors often inquire whether it is better to start a new franchise or to purchase an existing franchise business.
I would like to highlight the pros and cons of investing in an existing franchise vs. a new franchise:
- Customer Base: An established and loyal customer base is a significant benefit for a new business owner. Existing franchises make it easier for new owners to leverage the advantages of an established customer as the franchise brand gives customers a sense of consistency. M Customers might not even learn if there has been an ownership transfer.
- Track Record: The business has a record of accomplishments and a reputation in the community with existing customers. It is possible to examine current sales, working capital requirements, margins, seasonality and operating trends. . You would not have to rely on the ranges and averages of other franchisees in the franchise system to make an investment decision.
- Flexibility in negotiations: Most franchisors have a set fee structure for new franchise locations, and are unwilling to negotiate on terms or price unless the franchisee will develop multiple units. Buying an existing franchise allows you to negotiate directly with the seller.
- Unknown motives and liabilities: Why would someone want to sell a profitable business? Are current trends for the business consistent with the historical results? Are there new competitors coming into the market that could affect future performance? Have any problems in running this business moved them into a position to sell? Can you find solutions to those same problems? Bottom line: It is difficult to learn the true motives of a seller.
- High cost of due diligence: An audit of the business should be performed. Never assume that all the information supplied by the seller is correct. There might be personal obligations tied to the business you are purchasing. There can be significant costs as compared to the value of the business. The majority of times, there are numerous bidders trying to purchase the same existing business and you might be out-bid despite your sunk initial due diligence costs.
- Approval needed from Franchisor: The franchisor always has the right to approve or deny the buyer of the existing franchise unit. You may be required to complete a lengthy and costly orientation before the franchisor gives you their final approval as a franchisee. In this case, you should have a clause to terminate the deal if, for any reason, you are not approved by the franchisor. Some existing business sellers are unjustly biased against foreigners thinking they will not be approved by the franchisor and therefore prefer American buyers.
- Lower Purchase Price: New franchises often require less financing as you are not acquiring existing cash flow from an established customer base. Also, you are not paying for the “goodwill” value often expected by the seller of an established franchise.
- Clean slate: A new business that is not affected by the habits, management style and/or problems of a previous owner. You do not need to worry about past upset customers and any negative feedback in social media (Yelp, Facebook, etc.). During the real estate selection process, you can select the location that will be the best for the next 10+ years rather than the location at the time the original franchise was established.
- Latest equipment and design: You will have the advantage of newer equipment and technology. Outdated equipment can be especially problematic in industries such as food service. It is important to make sure the business is outfitted with reliable machines and the latest designs.
- Variable cost to start the new franchise: The information provided by the franchisor in their Franchise Disclosure Document (FDD) provides an estimate of your expenses to develop the new business. Although the cost should not vary widely, there are usually unanticipated surprises.
- Can be harder to finance: Many lenders like to underwrite loans not just on the reputation of the franchise system and your background but also on the performance of an operating location. For both existing and new franchises, it is difficult to finance the purchase as a foreign national but some franchisors have developed lending programs with financial institution friendly to immigrant investors.
For many investors looking to move to the U.S. in a short time frame, a new franchise might present the best opportunity. The investor will skip the negotiation process with multiple sellers and lengthy due diligence process. In addition, many sellers stray away from the sale of the asset being contingent on the approval of the visa further limiting the existing businesses available. Most of the franchisors that Visa Franchise works with, allow the purchase of the franchise to be contingent on the visa approval.
Whether you prefer to focus your search on an existing or new franchise, Visa Franchise is here to support you throughout the process!