How to Buy a Business: Use a Due Diligence Checklist When Choosing Between a Franchise and an ECommerce Company
Author: Elliott Holland
Your due diligence checklist will depend on the type of business you’re considering buying
Key Takeaways
Purchasing a business is a major financial decision
Opting for a franchise or eCommerce business depends on your needs
These business types have significant differences
Your due diligence process will depend on which business type you pick
Buying a business is perhaps the most important decision you'll ever make. Buying the right company could set you up for life, while a failure will likely leave you with significant financial issues.
You might come across two options during your search: franchises and eCommerce businesses. These business types are quite different because one relies on a tested income generation method (but limits your freedom) while the other operates completely online.
Learning how to buy a business, gathering as much information as possible about each business type, and following a due diligence checklist can help you succeed. Here's a look at the differences between franchises and eCommerce you should know when purchasing a company.
What is a franchise?
Franchising is the act of buying one or more locations of an already established company. Restaurants, hotel chains, and real estate firms commonly offer franchise opportunities, including brands like McDonald's, Burger King, Marriott, Hilton, RE/MAX, and Century 21 Real Estate.
As a franchisee, you'll receive instructions on how to run the company, marketing materials, and supplies. You will also use the company's logo, name, and reputation to generate business.
Purchasing a franchise provides a ready-made business plan, making it a less risky venture than many other business types. Plus, you can often secure financing more readily, especially since some franchises offer private loans.
However, franchises come with significant upfront costs because the company wants to make its money, even if your business fails. You'll also have less flexibility because you have to run the business as the parent company instructs. You could also see the organization's brand recognition become a hindrance if the public turns against the company.
Investing in a franchise opportunity can be lucrative, however, as some companies will succeed nearly anywhere. Nevertheless, learning the drawbacks helps you make an informed decision before you buy a franchise.
How eCommerce businesses work
ECommerce is the act of trading, buying, or selling goods or services over the internet. Many eCommerce firms operate entirely online, selling products and shipping them directly to consumers or other businesses. It's a growing industry, too, as FTI Consulting estimates that online retail sales in the United States will reach $1.07 trillion in 2022, up 11.7% from 2021.
Many small businesses now rely on eCommerce for all their sales because it opens them up to new national and global customers. There's also less overhead than operating a storefront, and they can keep their online shops open around the clock without paying employees.
As more consumers turn to online shopping, the amount of money changing hands continues to grow. ECommerce businesses can also scale quickly with demand and integrate customer data to drive sales.
The main problems with eCommerce involve the distance between the customer and the company. For example, there's no in-store experience, so customer service could be an issue. Companies or consumers are also on the hook for shipping expenses, and the time it takes for a product to arrive can pose challenges.
Online retailers know that customers can compare prices within seconds, which can make it more difficult to make a sale and turn a profit. Online security is an issue, too, especially when collecting customer payment information. One breach could sink your business, particularly if you don't have adequate cybersecurity insurance.
Considering all the pros and cons is essential before you buy a business online. The information you gather can help you make this critical decision for your future.
Deciding between a franchise and an eCommerce business
An essential part of buying a business is picking the option that will earn you the most money while making you happy. As a result, it’s a good idea to speak with a few franchise and eCommerce owners about their day-to-day operations before jumping in.
Once you select a business to potentially purchase, the next step is to consult a due diligence checklist as you go over various aspects of the company's financials. This checklist can help ensure you know as much as possible about the company before finalizing the agreement.
If you're looking at a franchise, you'll want to examine:
Annual and quarterly financial information
Financial projections
The supply chain
The competitive landscape
Available products
The marketing strategy
Management and employee relations
Current litigation against the company
Gathering this information lets helps you know if a franchise is a good fit for you and provides insight into your floor and ceiling as a franchise owner. It also informs you of how long it'll take to begin earning money after paying your startup and franchising fees.
Purchasing an established eCommerce business is a bit different because you won't have an established brand to assist in the transition. Your due diligence should include analyzing the company's profit and loss statements by examining units sold, gross income, gross profit, expenses, and net income.
You'll also want to better understand the supply chain and how you'll get products to the customer before buying an eCommerce business. It’s also essential to learn how you'll reach customers, how many customers the company already has, and how much competition is present in the current market.
The more you uncover during the due diligence process, the easier it becomes to select the right business opportunity for you.
Make it easier with professional due diligence help
Buying a business is a big decision, so you'll want as much information as possible before finalizing the deal. Understanding how a company operates and how you'll earn a return on investment is an essential part of the discovery process.
Guardian Due Diligence can help as you decide on the right business type to buy. We can provide a Quality of Earnings report before you purchase any company, giving you the confidence you need to make an informed decision. Contact Guardian Due Diligence today for more information or to schedule a call.