Learn what makes a business a turnkey business, along with some advantages and disadvantages that come with them.
What Is a Turnkey Business?
The phrase “turnkey business” refers to a business that requires little-to-no effort to open. A business model (hopefully a successful model) is already in place, and the products and services have been defined, so the startup phase is complete. The idea is that a good business manager can buy a turnkey business and keep it running smoothly—and profitably—with little effort.
How Does a Turnkey Business Work?
One of the most common types of turnkey businesses is a franchise. In the case of franchises, a turnkey business often includes a building that has been constructed to the franchise’s specifications. Tim Horton’s and Subway restaurants are examples of turnkey franchise businesses. The other common way to acquire a turnkey business is to buy an established business. There are always plenty of businesses for sale. According to industry experts with the website BizBuySell, more than 2,200 small businesses were sold in the first quarter of 2020. Business owners on this site may want to retire, relocate, or otherwise leave the business to someone else—for a fair price.
Pros and Cons of a Turnkey Business
Pros Explained
Proven business model: As long as you do your due diligence and ensure that a business model has actually proven its success, then most of the risk and uncertainty associated with starting a business is eliminated. The buyer does not need to worry about whether the product or service will sell or not, so they can focus on running the business. The facilities, equipment, and (in the case of independent businesses) perhaps even employees are included in the sale, simplifying the takeover process. Franchise company may provide support: Everything from the restaurant location to the menu can be predefined by a franchise for the buyer. The company may also provide employee training, national marketing, and assistance with management. Built-in customer base: Purchasing a well-established, existing business has the benefit of a built-in customer base that already appreciates the product and service. This can help improve the failure rate for turnkey businesses compared to independent startups.
Cons Explained
Expensive: Buying an established business or franchise requires a substantial investment. For a franchise such as Tim Horton’s, for example, you must have $1.5 million in net worth and $500,000 in liquid assets. The franchise fee for a 20-year franchise agreement is $35,000. Even if you’re considering an independent turnkey business, not a franchise, it will still likely require a major investment of capital.Franchises can be restrictive: Franchise businesses are typically very restrictive. The owner has much less control over how the business is managed and operated compared to an independent business. For instance, the contractual requirement to purchase equipment and supplies from the franchise’s head office means you cannot obtain these items from less expensive sources.Difficult valuation process: Purchasing an existing independent business also requires careful investigation, and it can be difficult to properly assess its value. It is important to find out why the business is for sale. The company may have recently lost a large contract, has a huge tax liability, or otherwise be in decline. It’s also important to consider the value of any inventory, equipment, or employees included in the purchase, along with intangible assets like reputation.
