NASE Blogs

From the Trenches ... Buy a Franchise or Start from Scratch?

Monday, May 10, 2010

 

 

Q.  I am planning to start a business and have the option of starting it from scratch or purchasing a franchise in the same professional line. What are the advantages and disadvantages of franchising versus creating my own identity?

 

A.  The world of franchising has changed a great deal over the past 20 years … some for the better and some for the worse. While the failure rate of start-up businesses during the first few years is commonly in the 40-percent to 50-percent range, franchises tend to realize a lower failure rate of around 10-percent to 20-percent. Obviously, this is an indication that franchising may offer a better opportunity for success which might make it sound like an automatic to go with a franchise but it is still critical to do your homework.

 

The number of franchise opportunities has greatly increased over the years and while the Subways and Starbucks continue to be strong … there are many other franchises that are nothing more than a way for a franchisor to get rich by selling people the Great American Dream ... which can easily turn out to be the Great American Nightmare!

 

There are several reasons why good franchise programs realize higher success.

1.  Franchising often offers a turn key business where all you need to get started is … equipment, merchandise, marketing, and most importantly training.

 

2.  Franchising can put you into business with a product or service with an established identity and reputation.

 

3.  You generally have ongoing assistance from the franchisor and individuals who have expertise in their professional field.

 

4.  Initial training to run the business is usually provided by the franchisor along with ongoing refresher training programs.

 

5.  Franchising usually provides you an ongoing program of advertising, public relations, and other marketing support.

 

6.  Franchisors may assist with your financial needs to open the business or have sources which can provide financing.

 

While there are upsides to franchising, there can also be downsides.

1.  The up-front money to start a franchise may be out your of reach.

 

2.  You will pay ongoing royalties and marketing fees to the franchisor which may range from 4 or 5-percent to over 10-percent of your gross sales.

 

3.  Franchisors may require you to purchase merchandise or operating supplies from them which could be purchased for less through other distributors. Or, the franchisor will put certain specifications on products sold or equipment you use that makes these items more expensive.

 

4.  You will be dependant on how others in the franchise program operate their business. If poor products or services are provided by the franchise organization, you could suffer from the negative image other people created that you have no control over.

 

While there are many good franchising opportunities there are also thousands of horror stories from people who made decisions looking through rose colored glasses. A lot of bad opportunities exist in franchising and it is important to look at a franchise cautiously and conduct a thorough investigation, just like you would do if you were opening a business from the ground up.

 

1.  Do a market analysis in your area to convince yourself that the product or service is viable in the area that you want to start it. This means doing primary and secondary market research as well as a strong competitive market analysis.

 

2.  Even though the franchisor might provide a basic business plan, do one on your own so that you have a solid base of just what the infrastructure of the business will need as well as the financial demand the business will experience until it breaks even.

 

3.  Most importantly ... talk to all the other franchisees you can. They will have invaluable information on not only the business but the support that you can expect from the franchisor.

 

4.  Take a look at local opportunities of other businesses in the same profession for sale. You might find an existing business that already has a good reputation with a client base and positive cash flow. This consideration might be more expensive up front but in the long run might produce higher profits and cash flow.

 

5.  Do a cost and profit analysis of going the franchise route versus starting the business from scratch or buying an existing business. If you have a strong knowledge of the industry and contacts to be able to get immediate customers for the business you might find that starting from scratch might take you three years to get to the revenue and profit levels that a franchise will get to in 6 or 9 months but then consider that after that three years ... you won’t be under the control of the franchisor or feeding their corporate coffers.

 

There is no simple answer to whether a franchise is the best option for a start-up or building a business from scratch. The final answer will depend on the individual, their level of experience, their financial position, and what you determine from doing a solid market analysis.

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