Franchise or Independent? Choosing the Right Business Format
One of the first questions many prospective entrepreneurs face is whether to pursue business ownership through franchising or the independent route. Franchising offers a number of advantages for many people and in many situations, but it is not always the right answer for all people in all situations.
When all is said and done, the question of whether to choose a franchise or an independent business is one that must be answered on a case-by-case basis. The only way to come up with an intelligent answer is to look at the relative advantages and disadvantages of each approach.
Franchising offers many advantages, but it is not always the right answer for all people.
Although franchising is often referred to as an industry, that is a misnomer. A franchise is a legal and commercial relationship between the owner of a trademark, service mark, trade name or advertising symbol and an individual or group seeking the right to use that identification in a business. The franchise format is used in many different industries, ranging from accounting and advertising to vending and water-conditioning.
As the owner of a franchise business, you will be bound to follow a set of rules dictated-unilaterally, in most cases-by the franchise system's owner. The franchisor has created a template for a successful business, and it uses that template to replicate its success from location to location.
The advantages to franchisees are significant. They benefit from the franchisor's experience and expertise, so they don't have to "reinvent the wheel" in their own venture. Most franchise systems spring from a successful business that has been operated by an owner who is interested in expanding its reach. All or most of the problems likely to be encountered by any individual unit in the franchise have already been met and resolved by the original business.
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Potential customers are more likely to be familiar with the name, brand or trademark of a franchise system than that of an independent business. Consumers know they can go into any franchised fast-food outlet or coffee shop, for example, and expect the same quality of product and service they get at their hometown outlet. That consistency of product, quality, service and brand identity is one of the major advantages of owning a franchise.
Buying a franchise is like buying "a business in a box," is how one franchise consultant puts it. "Because a franchise is a known quantity with an existing brand identity, a new franchise business has the potential to establish a customer base much more quickly than a comparable independent business. As a result, it may begin turning a profit sooner than the independent business would."
Potential customers are likely to be more familiar with a franchise's brand or trademark.
In return for the advantages franchisees receive from their franchisors, they pay an initial franchise fee-in effect, the price of purchasing the business-and an ongoing fee (royalties) based on a percentage of the franchise unit's sales. Royalties run between 3 and 8 percent in most franchise systems, and some collect an additional 1 to 3 percent that is earmarked for an advertising fund.
At least as important as the financial contributions franchisees make to the system is the combination of entrepreneurial spirit, drive and ambition that they bring. In theory, a franchise chain with hundreds of outlets managed by individual owners is going to be more successful than a similarly sized independent chain whose outlets are managed by employees who have no ownership stake in the business. It is a theory that has proven to be correct many thousands of times.
Clearly, taking advantages of all the benefits franchising offers involves a tradeoff. While franchise owners are bona fide entrepreneurs, ultimately responsible for their own success or failure, they have to sacrifice a certain amount of independence for the greater good of the franchise system.
For example, while an independent business owner is free to decide on a whim that his or her business would look better with a new style of decor or a new emblem, the franchise owner has no such freedom. If each owner within a franchise system were free to make such decisions individually, the consistency that constitutes so much of the value of belonging to a franchise system in the first place would be compromised.
Taking advantage of franchising's benefits entails a tradeoff of some independence.
Likewise, franchisees face much stricter constraints when it comes to buying their businesses than independent owners do. The Uniform Franchise Offering Circular (UFOC) and various state franchising regulations dictate what information must be included in the documents given to prospective franchise buyers, but there is no standard franchise agreement.
While each franchisor creates its own franchise agreement or contract, those contracts are almost always non-negotiable. The buyer of an independent business can haggle with the seller over what price will be paid, but in the case of a franchise, the price-and virtually every other material aspect of the deal-is "written in stone" in the franchise agreement.
MAKING THE RULES
For some entrepreneurs, the major appeal of buying an independent business or starting one on their own is the freedom that comes with setting their own rules. The independent owner dictates the company's vision and controls every aspect of its operation, from hiring and firing to choosing suppliers and setting prices.
Such unbridled creativity can be a tremendous asset, but only when it is wielded properly and in the right hands. The danger of too much creativity and innovation-or of those things inappropriately applied-is destabilization of the business. In order to build a customer base, a business has to establish a consistent identity for itself.
In general terms, creative individuals might be better suited to an independent business, where they would have the freedom to develop and implement their own ideas and change course as they see fit. The franchise environment is more conducive to systematic, schedule-oriented temperaments and those with a strong management background. Generalizations can be dangerous, however, and there exceptions to every rule.
The best place to begin in deciding whether your right path to business ownership is franchising or independent is to ask yourself why you want to become a business owner at all. Among the reasons commonly cited are:
The desire to be your own boss. If this is your primary motivation for owning a business, franchising might be a problem for you. The franchise relationship is built on mutual trust and respect between the franchisor and its franchisees, and individual franchisees must be prepared to subjugate their own will to what is best for the overall system. That is a determination that is almost always made by the franchisor-sometimes with input from a franchisee association, but almost never at the behest of an individual franchise owner.
Financial rewards. Most people who go into business, franchised or independent, do so with the intention of making money, but many have other motives as well. If maximizing financial returns is the main driver behind your desire for business ownership, franchising deserves a close look. While there is an ongoing debate about the success rate of franchised businesses versus independents, there is little doubt that the many advantages a good franchise offers can help ease the path to profitability-especially for those with limited prior experience as business owners.
You have your own idea for a new business. In this case, the independent route is most likely the better choice. Inherent in the franchise concept is running a business based on an existing idea with an established record of success. That's not an environment conducive to the incubation of a totally new business concept. However, franchising can still play a role if your idea does turn out to be a winner. You might want to consider growing your enterprise by becoming a franchisor yourself.
You are financially secure but are looking for a challenge or simply want to do something to occupy your time. That is an enviable position to be in, and a franchise business might be just the answer. Having the financial wherewithal in place to fund your startup gives you the luxury of exploring a broader base of franchise opportunities and taking as much time as you want to do it. Once you find a franchise that fits your criteria, you will get everything thing you need for a business start-up in a single package: site selection assistance, training, inventory, management advice, etc. Many early retirees and former executives who have been victims of downsizing fit this profile.
Some experts believe that choosing between the purchase of a franchise or an existing independent business is more difficult than deciding whether to buy a franchise or to start a new business from the ground up on your own. That is because the franchise and the existing independent business are likely to have a number of similarities, such as:
Independents can dictate the company's vision and control every aspect of its operation.
Both are likely to be successful, at least in concept, or you would not be considering the purchase of either of them.
Success comes at a price, and as the buyer, you are the one who is going to pay that price. While the successful independent business is likely to command a premium in the marketplace, the franchise also might carry a premium because of the franchise system's history of success.
Both may come with existing name recognition, although the independent business's recognition is more likely to be local, while the franchise's name recognition will probably be at least regional and possibly national in scope.
You may be offered help in getting started in both cases. Start-up assistance is a given with most franchise opportunities, but many deals for the purchase of an existing independent business are structured so that the seller either stays for a period of training with the new owner or makes himself or herself available in a consulting capacity for a specified period of time.
For the average new business owner, franchising offers a number of advantages that an independent simply cannot match, in most cases. A critical one is continuous management support.
A core concept of franchising is that the franchisor provides its franchisees with ongoing management support for the life of the franchise. With an independent business, in contrast, even if the seller has agreed to provide guidance and/or training to the buyer, that assistance is only for a limited period of time. When the time is up, the new owner has no one to rely on but himself or herself.
In general terms, creative individuals might be better suited to an independent business.
Most franchise systems pool the resources of the franchisor and its franchisees to fund regional and/or national advertising campaigns, a strategy that helps build brand recognition for the franchise and draw new customers to its outlets.
While individual franchisees would not be able to afford such expansive advertising programs on their own, leveraging the buying power and resources of multiple franchisees makes it possible. No such strategy is available to the independent business owner, who must rely on cheaper local advertising, which may be less effective.
As mentioned earlier, the relative success and failure rates for franchise versus independent businesses has been the subject of much discussion lately, and additional research in this area is currently underway.
For many years, it was a widely held belief in franchising that franchise businesses experienced a failure rate of about 5 percent, while independent businesses had a failure rate of 30 to 50 percent. Subsequent research-notably a 1995 study by Timothy Bates, a professor at Wayne State University in Detroit-raised serious questions about the 5 percent failure rate claimed for franchising. The Bates study suggested that it might be closer to 30 percent.
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QUESTION OF DEFINITION
The main point of discrepancy is how "failure" is defined. Historically, franchisors did not deem a franchise business as "failed" if the location was sold by the former franchisee to a new owner, or if it was resold by the franchisor to a new franchisee. That reckoning did not take into account the reason for the original franchisee leaving the business.
Whatever the success and failure rates of franchise businesses are ultimately determined to be, there is widespread agreement among business experts that franchising tends to lessen the level of risk for new business startups, especially for those with little or no prior experience with business ownership.
"A franchise system can only be successful over the long term if the individual franchisees who comprise that system are also successful,"
is how one long-time franchise business consultant explains it.
"A good franchise company generates the bulk of its profits from the royalties paid by existing franchisees, not from the sale of new franchises," he says. "Since those royalties are directly tied to the sales volume of the individual franchise outlets, the franchisor's success is inextricably bound to that of its franchisees. It is a wholly symbiotic system, one where each party to the deal has tremendous motivation to see the other party succeed. It is a true win-win situation, something that is quite rare in the business world."
The final critical point that sets a franchise business opportunity apart from an independent business is the inclusion of a complete business methodology as part of the deal with the franchise business.
"Franchising is a true win-win situation, something quite rare in the business world."
"Buying a franchise is as close as you can come to buying a truly turnkey operation," the consultant notes. "The franchisee has to come up with the capital to get the business started, and he or she has to be willing to invest the sweat equity needed to make it a profitable venture. But in terms of holding your destiny in your own hands and still having the security of a substantial safety net, franchising really does offer the best of both worlds when it comes to business ownership."
In the end, the choice between franchise and independent is yours to make.
Pitfalls of franchising
Many people about the opportunities of franchising, but less of them know all nuances of work in this branch of business.
There are few principal tips, which can significantly assist in starting franchising:
Business should be chosen correctly.
One shouldn’t start business with restaurants, if he/she wants to work in banking. Furthermore, people have various experience and lack of certain experience can make franchising in some branches to be failed and gainless. Considering the initial investment in business, such activity will be dead. Avoiding of this situation lies in the proper searching for good company to invest. There is one company that can help with this kikiamo. They list a number of companies, which present their offers for investment.
Lack of business skills can significantly undermine business activity in during the development of company. One can think that he/she has enough skills for business conducting, but real experience can reveal their lacking. Business requires certain skills, and businessman should have them for success.
People shouldn’t invest in companies, which are effective and can bring money, but are boring for franchisee, such investment will fail. At the beginning it will bring disappointment of this investment and then it will turn in the serious fail, or even bankruptcy.
All franchiser companies have initial training that describe the system of cooperation with the company and one should follow it. Failing to follow very often leads to fail. One should read manuals, which company provide with, learn business tricks and learn every single day other aspects of the selected branch. Finding of more information regarding to franchising is easier with kikiamo.it.