Is investing in a Small Business VS a Franchise

A few weeks ago I made a post about investing in small franchises to add to your current income stream. Today’s posts goes a step further and explores the idea of buying an exiting small business that is not a franchise. No business is the same. There is often little or no documentation like that a franchise would provide when buying a small business. Buying a small business requires much more research and attention- but can be very rewarding. Another term investors use is investing in a ‘business opportunity’.

Similarities to Franchisees:

  • Potential to earn a living income
  • You can be very independent because you run your own business
  • Can vary in price from $30,000 to $10,000,000.
  • You’re usually also buying a clientele stream along with the business.

Differences from Franchisees

  • You don’t get a Uniform Franchise Offering Circular (UFOC). The UFOC is essentially a document that outlines the businesses performance history, profits, losses, etc. Some business can provide records, but not nearly as detailed.
  • Don’t have to deal with corporate rules or pay dues and fees.
    • And as such, you have the very real reality of managing the business with so support line.
    • As a positive, you have a lot more independence and control over your image and product/service.
  • There is no “Brand” per se, or at least not in most cases.
    • This provides the opportunity to build a brand, or to change it upon acquisition very easily.
  • You usually need to invest a lot more time in the image and upkeep of the business. Sometimes, you must even manage it full time yourself (which is a great option for some)
  • There is often seller financing.
    • Seller financing is great, because it makes it easier to negotiate the mortgage and down payment. In these scenarios you work with the seller directly as a lender instead of a bank. The catch is it’s a little riskier and you will want the contract reviewed by a lawyer.
  • They can be used as a “starter package” for a different business
    • You can buy out a small business to save money on buying various equipment they may already have.
  • Can vary in net cash flow, but you can often expect to make about 1/3rd the upfront cost of the business the first year. In some cases much more, or some less depending on the service. Franchises vary as well, but tend to have more stable profit projections with a lot of math to back it up.

Buying a small business usually requires more time and effort, but can often cost less money upfront. If you want to learn more about buying a small business I can’t recommend this guide enough: HBR Guide to Buying a Small Businesss. You will need to learn how to properly value the business as well as understand the market and clientele. Unless you have the assets to hire someone to properly manage your business, you better be prepared to figure it out for yourself- of risk losing it all. Often times, buyers will manage it themselves in the beginning and until they can train someone else to do it for them.

All in all, a small business is a good investment- but as an investor you need to be savvy and understand the product. Buying a small business is usually easier than buying a franchise, thus it is more accessible to potential investors.

I’ve considered recently what kind of starter businesses I could get behind. Pizza, I think, is my favorite. In high school and college I worked for a local pizza shop and I loved it. Usually, Friday and Saturday nights in the pizza kitchen were very exciting! Making pizza is actually very rewarding and fun. I even have a my own super secret recipes for delicious fluffy dough and sauce(s). Recently, I looked around Washington and found a few pizza places were for sale. I may jump in and just enter the restaurant business one day. I have the advantage of already knowing the business. That may be a quick way out of the 9-5 and on the road to independence. 🙂

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