So you figured out that you want to start a small business. You have some capital in place and few business ideas on what to do. However, you’re unsure if you should buy a popular franchise or launch your dream business you always thought will be fun. It seems like a tough question, but it is not. Hopefully, I will address all your doubts with relevant facts through this blog.
”According to FRANdata, multi-unit franchise owners own 53% of 450,000 franchise units in the U.S and 76.5% of franchised restaurants...
In short, owning a franchise could jump-start your new business. Read on to know how.
1. Instant Brand Recognition
One of the most significant advantages of being a franchise owner is instant brand recognition. With a franchise, your buyer will know about your offerings, prices, and hence value ad, very quickly. Without a known brand, it can take a few months before people know what products or services you provide. It also means you will be running the new business at a loss for a long time before you break-even or make a small profit.
2. Dedicated Resources
A franchisor is in the business of making money through operation of thousands of franchises. So they always have dedicated staff for all aspects of operating a business, right from location selection, government regulations & safety, technology, marketing and training of staff. Some franchisors also help with the profitability of business while others are only interested in revenue. Either way, they guide the new owner towards higher gross and net profit.
As a franchise owner, you get ready access to all these resources, saving you lot of time and cost.
3. Possibly High Success Rate
Depending on the type of franchise you own, the success rate can be significantly higher than starting an independent business.
4. Quick Expansion Prospects
Expanding a franchise is quicker than an independent business as franchises are easy to buy and sell. In fact, according to FRANdata, multi-unit franchise owners own 53% of 450,000 franchise units in the U.S and 76.5% of franchised restaurants.
Before buying a franchise, here are a few points that one must keep in mind:
1. High Cost of Entry
Entering a franchise requires upfront fees which ranges from $150K to $2.5M for the top 10 franchises. On the other hand, one can start an independent business with as little as a few thousand dollars.
2. Royalty Fee
Most franchisors charge 5-10% of the total revenue from franchisees which could result in a substantial loss of profit.
3. Fixed Products and Services
The franchisors want to make sure that all their locations look same and carry same products and services. For this reason, they do not allow non-approved products and services to any franchisee.
4. Dependency on Franchisor
As a franchise owner, you are contractually bound to the franchisor. So you can only buy products from their approved vendors. Franchisor can also add products, services, and additional locations owned by someone else which could be profitable to the franchisor and not you. Hence it may sometimes cause a conflict of interest.
Ultimately owning a franchise or starting an independent business is your decision, but above guidelines will help you make a better choice. Stay tuned for my next blog for a deep dive into advantages of buying a franchise.