Choosing Between a Franchise and Starting a Business
Owning your own business has always been a linchpin of the American Dream. With the advent of franchising, prospective owners now face a choice between running an independent business and operating their business unit as part of a franchise system. Put differently, they can launch a brand new restaurant churning out specialty cakes and ice cream sundaes, or open a Cold Stone Creamery location. Determining the right option for you comes with some complexities, but there are a couple of primary factors to consider: Your risk tolerance and your personality type.
The risks of launching an independent business and joining a franchise system are drastically different, so it’s important to consider how the challenges of each scenario align with your appetite for uncertainty. It is estimated that there are more than 550,000 franchise businesses in the U.S. today, generating more than $800 billion in annual sales. Precise success rates for independent businesses versus franchised ones are not available, but most business experts believe that franchised businesses have a better chance of success than independently-owned small businesses. The numbers published by the Department of Commerce and the U.S. Small Business Administration come the closest to offering a valid comparison. The Department of Commerce reported that, since 1971, less than 5% of franchised businesses have failed or been discontinued each year. On the other side, the U.S. Small Business Administration reports that 65% of business start-ups fail within five years. Rather than relying solely on these generalized statistics, though, we encourage our clients to focus on the typical challenges you must overcome depending on the route you choose.
First, some of the shared hurdles. In both situations, successfully growing a business and generating revenue requires the adept management of employees, expansion of the customer base, and adaptability to an evolving market environment. Moreover, both paths can be thwarted by unfriendly economic climates that inhibit growth regardless of managerial competence. While independent businesses and franchises have these headwinds in common, the methods available for business owners to address these obstacles differ greatly depending on the chosen ownership structure.
Franchisees enjoy the benefits of participation in a broader brand family, making some of the aforementioned problems easier to navigate. For example, managing employees requires a specific skill set, and the ability to come up with a new idea for an individual business does not necessarily correspond with excellent people skills. The same holds true for marketing strategies, operations, and vendor/supplier relations. Thankfully, as a franchisee, the franchisor offers training/support programs to educate and assist their franchisees through these processes. Cold Stone Creamery is a prime example, as their franchisees receive guidance on issues including real estate site selection and lease approval, store opening and build-out, operations, marketing & public relations, and more. In addition, the franchisee benefits from the buying power and efficiencies of scale in the franchise system. A prominent, professional franchisor in your corner negotiating lower prices for supplies and services removes the distraction, allowing you to focus on areas where you can truly add value, like cultural development. Growing the customer base becomes less of a challenge, too, since you can count on the franchisor to maintain the brand’s prestige through their marketing efforts. Overcoming difficult economic conditions remains a tough test, but you can at least have hope that the customer loyalty cultivated by the franchisor will lessen the impact of a slower business environment.
While these benefits point towards picking a franchise for risk-averse individuals, franchisees must sacrifice a level of autonomy that may deter some control-oriented operators. It is crucial to get comfortable with the rules of the franchise system before agreeing to participate, while an independent business owner assumes authority over every aspect of their operation. The latter inevitably leads to more pressure, but the personal fulfillment may be more appealing depending on your personality type. While franchisees can sometimes be more hands-off with their businesses, independent business owners typically must be heavily involved in their companies and their development, and are solely accountable for the success or failure of their ventures. Depending on the financing structure of the business, this can be more fiscally rewarding, especially since franchisees must pay fees to the franchisor for the benefit of passivity.
Deciding between running an independent business and operating a business unit as part of a franchise system is an entirely personal choice, depending primarily on risk tolerance and personality type. We encourage our clients to consider the many variables involved before making a leap in either direction. Should you decide to pursue franchise participation, the brand you choose should be as thoughtfully examined as the concept around which you launch an independent business, especially due to your lack of authority over the future direction of the brand. Approaching a platform like FranchiseHelp can hugely increase the rate of satisfaction for franchisees by ensuring they contemplate each option before beginning their journey as an operator.
Three Keys to Franchise Success
The first is to understand the key drivers of success in your business -- that is to say, the three or four major strategies or operational processes that make up the engine of profitability and success for your organization. As an example, for a restaurant these factors may include things such as speed, consistency, freshness, cleanliness and friendliness. For an auto parts store the key drivers will probably include inventory availability, customer service, expertise and pricing/margins. Once you understand the key drivers, it is critical that you focus on them incessantly and help everyone in your organization understand that it is their responsibility to make sure those drivers are the top priority for them every day at work.
A Break Down of Franchise Royalty Fees
When you first start your franchise you typically pay a franchise fee upfront. This will cover a variety of things that depend on the franchise you're dealing with, but often it will go towards initial training, marketing, and the rights to use the franchises logos, names, systems, and products. But that's not the only fee that franchisees will pay to a franchise. In addition to the initial franchise fees, the vast majority of franchises will charge their franchisees royalties that can come in one form or another. These royalties will often go towards ongoing training, sales of goods directly from franchisor to franchisee, and advertising and marketing efforts. The exact terms for these royalties are set out in your franchise agreement, but they come in a few common forms.
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