The Pros and Cons of a Franchise.
Should you start a business or buy into a proven formula? Theanswer depends as much on personality as on economics
Q: I am thinking of opening a small business and wondering whether to goindependent or buy a franchise. Can you give some of the pros and cons of eachapproach? -- B.D., Maple Park, Ill.
A:Becoming a franchisee has many advantages over starting a new business onyour own -- but be warned, the life of a franchisee is not for everyone. Thedeciding factor, experts say, is honestly assessing how independent you want tobe in your business. Do you enjoy being in charge? Do you chafe at advice, rules,and restrictions? Do you yearn to try new approaches to growing your company,and hope to experiment with advertising, customer support, new products, anddistribution channels?
If you have a true entrepreneurial personality, you may want to think twiceabout franchising. Do not go into any franchise program thinking you'll havemuch control," franchises provide you a list of what you can and cannot doin order to maintain consistency. With your own independent business, no oneprovides any controls on you, for better or worse.
"ENTREPRENEUR LITE." "Franchiseesoften think of themselves as entrepreneurs -- but they are not," saysMichael Seid, a food and franchising consultant based in West Hartford, Conn."They are more like 'entrepreneur lites.' Entrepreneurs want to start newbusinesses and they want to make their own decisions. They like to experimentand have a need to operate and market their business based upon their own visionof how things should be done."
Franchisees, on the other hand, are provided with a system and standards on howto operate the business -- and they are contractually obligated not to deviatefrom them, says retail consultant Bob Phibbs, of Long Beach, Calif. "Aproven company has almost complete control of product, merchandise, advertising,etc.," he says. "This cuts the learning curve for new business owners.They know what has and hasn't worked in the past."
Once you've decided whether you yearn for total autonomy or crave hand-holdingand established systems, here are a few other factors that distinguishfranchising from entrepreneurship:
- Franchisees get the benefit of brand recognition, which ideally equates toan immediate customer base.
- Most franchisers provide information on selecting a location and developingit, including layout, equipment, opening inventory, etc.
- Franchisees get initial and ongoing training for themselves and their staff,along with continual support from the field and headquarters staff of thefranchise.
- Franchises are always doing research and development of new products on ascale that independent business owners cannot afford.
- Franchisees get the benefit of national advertising and promotions, productdistribution, national accounts, and critical mass in markets with otherfranchisees or company-owned locations.
"Probably the most important benefit is that a franchiser can project howmuch money the franchisee will need to get the business started, and how muchworking capital they will need to keep it going until it turns cash-positive,"Seid says. "Most small startup businesses fail not because they have a poorproduct or service, but because they could not predict how much money they wouldneed and ran out before the business became profitable."
• Independent businesses are privately held, which means that no one will belooking over your shoulder unless you invite them to do so. In a franchisesystem, however, you'll be expected to share information about your finances,revenues, and ongoing operations -- and you will be subject to periodic visitsfrom a field rep to assess how your business is doing.
• Independent businesses don't pay royalty fees to a franchiser, nor do theyhave to negotiate contracts with a home office.
• An independent business owner is really her own boss. In a franchise, you'llbe expected to work with other franchisees on decision-making, and you'll beexpected to go along with the majority even when decisions are reached that youdisagree with personally.
• As an independent, you may benefit more from personal relationships withyour customers, most of whom prefer to do business with people they know. Youmay also benefit from the "David vs. Goliath" image that smallbusiness projects, provided that you give your customers better product andservice than the big chains.
• Independent companies often have little time for employee training andongoing review.
• As an independent business owner, it's easy for yourpriorities to become muddied, and you will have fewer resources to ask for helpin deciding where to spend your money and your energy.
• An independent company has no immediate brand recognition, so it will takelonger and cost more to build your brand.