Can you imagine making food from scratch anymore? The amount of time, effort, and stress that it usually comes with is easily eliminated by getting something ready made. This analogy works for businesses as well. Studies show that close to 90% of startups fail with almost 10% of them failing within the first year itself. With such a high rate of failure and so many pitfalls to consider, starting a business can be quite tricky. This is one of the big reasons why a turnkey business has become so favorable for a large number of investors.
What is a turnkey business?
A turnkey business is already well-established, fully functional, and requires minimal intervention. When someone invests in such a business or buys one outrightly, they bypass the whole anxiety and strain that startups go through in their early stages. Buying a turnkey business also comes with the advantage of gaining insights into the way the business works, its operating model, all associated permits and licenses, brand name and trademark, access to suppliers, technical infrastructure, and inventory.
What is a franchise model?
A franchise model is a widely popular one and has been in existence for several decades – think McDonald’s or Burger King. It shares certain aspects of a turnkey business in the fact that it is, too, an established business that does not require you to set it up from scratch. In this, a franchisor (the parent company) allows you to use its branding, and business model and offers training and support to you (the franchisee) to run the daily operations. In return, you need to pay a monthly royalty or a fixed recurring fee to the franchisor.
What are the key differences between the two?
Now that you know the high-level definitions of both, let us take a deeper look at their salient differences.
A turnkey business is likely to have a higher CapEx (capital expenditure). This is the one-time cost of taking over a portion of, or the entire business straight up. On the other hand, becoming a franchisee usually entails paying an upfront fee for the right of setting up a franchise, and the costs of setting up the technical and physical establishment to operate the business. Apart from these, there is the OpEx (operational expenditure) of recurring fees or royalty payments to be paid to the franchisor. Clearly, a franchise model can cost more in the long run.
After becoming the owner of a turnkey business, you get full autonomy in the operational and financial decisions involved in running the business. In a franchise model, though, all final decisions are made by the parent company. While you may have a certain amount of decision-making freedom, you cannot really claim complete independence in this model.
Franchise contracts can be quite complicated and are mostly in the favor of the franchisor. Some contracts require a small commission in each sale made, apart from a fixed royalty. Together, all these can really make a dent in your profitability. In a turnkey business, once you have assumed complete ownership, all your profits are your own, and you are free to either reinvest them in the business or encash them.
How to choose the right business to buy or invest in?
While selecting the business to invest in, you must consider the following factors:
- Age of the business – 3-5 years is considered the ideal age for a business to invest in. In this duration, it is deemed that the business has weathered the market swings, and the fact that it is still standing means it has a strong foundation.
- Financial health of the business – Before you buy a turnkey business or a franchise model, carefully comb through the current financial data and future projections. Tax filings, profit and loss statements, net sales, total expenses, outstanding debts, etc. are some of the key points you need to consider.
- Operational stability – Financial health, while important, is not the only important factor. The replicability of the operating model, stability in current performance, and scalability for the future are vital considerations as well. You need to check and evaluate the company’s operational metrics thoroughly. For eCommerce businesses, this data is more easily available and verifiable than for brick-and-mortar stores.
- Brand value – Whether it be a turnkey model or a franchise, the value and recognition of the brand are what will ensure continued sales and eventual profits. Online presence, active social campaigns, brand loyalty programs, etc. all contribute to creating the buzz that leads to higher customer traffic.
- Ease and cost of transfer of ownership – A strong contract and buyer’s agreement are quite important to ensure a hassle-free proprietorship later on. In a turnkey business, you need to understand if you are getting ownership of the entire business, its inventory, processes, trademark, technical infrastructure, etc. These are needed for you to be able to operate autonomously in the future. In a franchise model, too, you need to calculate the costs, royalties, and all other fees involved in order to be able to judiciously project your short, mid, and long-term cash flows.
Once you have carefully evaluated the pros and cons of each, you can explore the online marketplaces to identify the options available to you. Here’s an in-depth guide if you wish to know more about buying or selling a turnkey online business.
Vivek is a published author of Meidilight and a cofounder of Zestful Outreach Agency. He is passionate about helping webmaster to rank their keywords through good-quality website backlinks. In his spare time, he loves to swim and cycle. You can find him on Twitter and Linkedin.