Turnkey Business - Definition

Advantages & Disadvantages of Turnkey Businesses

close-up of a key in a keyhole
A turnkey business?. Image (c) Stockbyte/ Getty Images

Definition:

A turnkey business is a business that includes everything you need to immediately start running the business, as opposed to having an idea for a product or service and developing a business from scratch.​

In a turnkey business, a successful business model is already in place and the products or services have been defined and proven so the startup phase is complete. The phrase "turnkey" is meant to imply that little work is required by the buyer other than opening the door to customers.

Examples of Turnkey Businesses

The most common type of business sold as a turnkey business is a franchise. In the case of franchises, a turnkey business often includes a building that has been constructed to the franchise's specifications, and an exclusive territory. Tim Horton's restaurants and Subway are examples of turnkey franchise businesses.

The other common way to acquire a turnkey business is to buy an established one - there are always plenty of businesses for sale.

Advantages of a Turnkey Business

The biggest advantage to buying a turnkey business is that the business model has already been proven so most of the risk and uncertainty is eliminated. Established business or franchises have a much lower failure rate than independent startup businesses. The buyer does not need to worry about whether the product or service will sell or not; he/she can focus on running the business. Often  the facilities, equipment, and (in the case of an independent business) the employees are included in the sale, making the takeover process even simpler.

In the case of franchises such as Tim Horton's, for example, everything from the restaurant location to the menu is predefined for the buyer. In return, the buyer pays startup fees, franchise fees, and must purchase supplies and equipment from Tim Horton's. The company provides training, national marketing, and assistance with management (see Tim Hortons Franchise Review).

Disadvantages of a Turnkey Business

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 unencumbered capital. The franchise fee for a 20-year Franchise Agreement is $50,000.

Franchise businesses are typically very restrictive - the owner has much less control on how the business is managed and operated versus an independent business. (See Should You Buy a Franchise?) For instance, the contractual requirement to purchase equipment and supplies from head office means you cannot obtain these items from less expensive sources.

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 place to place if it exists at all. (Why B.C. is the Best Place in Canada to Sell or Buy a Franchise provides an overview of franchise law in Canada.)

Purchasing an existing independent business also requires careful investigation.  It is important to find out why the business is for sale - the company may have recently lost a large contract, have a huge tax liability, or otherwise be in decline due to competition or other factors.

Proper business valuation can be difficult for the buyer of an independent business. A business that is being sold as a turnkey business normally includes tangibles such as inventory and equipment through intangibles such as a previously established reputation and goodwill. Tangible assets are normally simple to value but intangibles can very difficult.

Read more: 3 Ways to Find What Your Small Business is Really Worth

Proper examination of the company financials (with the assistance of a professional accountant and/or business valuator) is vital before making an offer to purchase a business. (See How to Buy a Business.)

Also Known As: Turnkey. Often considered a synonym for franchise, but not all franchises are turnkey operations.

Alternate Spellings: Turn key business.

Examples: One of the things that Jeff really liked about the franchise opportunity he decided to invest in is that it was a turnkey business.

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