Why New Franchises Sell Better than Existing Businesses with Poor Financials

We are frequently asked by business sellers why a new franchise with no actual financial history will sell before an established business with good revenues but poor overall financial performance. Selling a new franchise is like selling a dream. It is a dream that is backed up by other successful performances, proven systems, and a qualified central management team. Yet the buyer’s future operation is still only someone’s vision. There is no historical financial performance that clouds the stellar possibilities with the reality of average or below average performance. The ugly possibilities remain tucked away. Because of this the untested new franchise appears to have much less risk than a poorly performing established business.

A business with poor financial performance is in a difficult spot. The normal due diligence process involves looking at financial performance before any other aspect of the business. The ugly possibilities take front and center. For this reason a “good” business with poor financial performance will be seriously looked at by very few qualified buyers.

On the other hand a business with well performing financials clearly has less risk than a new franchise. It is proven. Cash flow has been established. A buyer’s conservative accountant can review the information and come up with a valuation that is in the range of what will be paid for the business.Available third party financing follows this trend. A successful existing business is quite easy to finance through the SBA or sometimes local lenders.

A new franchise is fairly easy to finance through the same routes when demographic factors justify the operation. Yet when we get to poorly performing existing businesses the only financing is from the buyer or seller’s pockets. Generally there are few third party sources. New franchises sell before financially challenged existing businesses because of the perception that there is less risk associated with the purchase. The way to capture the buyer before they purchase a new franchise is to reduce the buyer’s risk. Unfortunately this is usually a combination of lower price and seller financing.