A turnkey business is a business that includes everything a buyer needs to immediately start running the business. As opposed to having a new idea for a product or service and developing a business from scratch, turnkey businesses can be bought outright, and the new owners only have to focus on managing ongoing operations.
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.
The phrase "turnkey" is meant to imply that little work is required by the buyer other than opening the door to customers and offering good customer service.
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.
Entrepreneurs considering buying a franchise business should always do their due diligence and be sure they know exactly what a particular turnkey operation includes. Not all franchise businesses are created equal, and to complicate things even more, franchise legislation differs from region to region—if it exists at all.
Pros and Cons of a Turnkey Business
Proven business model
Franchise company may provide support
Built-in customer base
Franchises can be restrictive
Difficult valuation process
- 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.
- 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.
- A turnkey business is an established business that can be bought outright.
- The phrase "turnkey" comes from the idea that all the buyer has to do is open the door to customers—the business is ready to operate.
- Franchises are a common form of turnkey business, including restaurants like Subway and Tim Horton's.