There are a lot of uncertainties when it comes to starting your own business. As the owner, you have to choose how much your employees are paid, what to price your products at, plan your marketing technique, pay the bills, and the list goes on. With a franchise, many of these decisions are already set according to the parent company’s standards. This is to ensure their customers have similar interactions with their brand no matter what part of the country they are located. It can take a lot of the pressure off of the business owner, but is it worth it in the end? The brand recognition is there that customers trust, so you may have a large customer base right from the beginning. However, many of the best franchises take a certain percentage of gross income regardless of whether or not the branch turned a profit. This can mean the owner takes home nothing at the end of the year after all of their hard work.
Cost of Starting a Business vs Buying into a Franchise
Many business owners use their own saved capital or apply for a loan to finance their business in the beginning. It takes money to purchase equipment, find an office to rent, pay employees, set up a record system, and advertise for the business. These expenses can add up quick, but a business owner can also find was to minimize these costs by finding deals and buying used equipment.
Joining a franchise, however, also comes at a price. Typically, a franchise partner can anticipate paying around $50,000 to buy into a franchise. This may be an out of pocket expense, or it may be financed with a loan as well. This buy-in goes toward initial expenses and training you on their systems. It may or may not include inventory and equipment. When buying into a franchise, business owners need to know the details of the contract, what is included and what is not.
Year to Year Operations and Growth Potential
In a typical year, a business owner makes many decisions on business practices, marketing campaigns, salaries, etc. The owners, or co-owners, are completely responsible for these decisions, which is a freeing experience for many. It’s usually what they’ve been looking forward to with starting their own business. A franchise location owner, however, must have nearly every decision approved by the parent company. This can delay time-sensitive decisions or frustrate owners when they think a certain plan would be really great for their store. Furthermore, the parent company may dictate when a store must update their office, systems, and/or uniforms. Even if the decisions create a loss that year, the business owner has very little say in the final decisions of the franchise. If the owner doesn’t comply, they could lose their rights to the store.
Selling the Business vs Selling the Franchise
When a business owner wants to retire or sell out to a larger company, the buying process is fairly straight forward. The business owner may list their location as a buying option, find an appropriate buyer, and agree to a sales contract. The buyer can then do what they want with their newly acquired company.
When a franchise owner decides to sell, their pool of potential buyers is smaller, plus they may have competition from their very own franchise! Two franchise stores in the same geographical location can lessen the value of each shop, and the franchise may be wanting potential buyers to purchase new stores rather than let them take over an older one. Even if the franchise owner finds a buyer, they may have to pay transfer fees to the parent company to make the sale final. Sometimes this can mean even losing money on the investment! Lastly, when the franchise owner sells, many of their customers will stay loyal to the brand rather than follow them to their next venture.
Although franchises appear to be less risky at first, they still hold a certain amount of risk, and often pay much less to the owner than if they were to own their own business. In the end, it’s up to each individual to decide what is best for them after researching the options and weighing the pros and cons. Franchises can offer more customers in the beginning and help the store succeed with standardized systems in place. However, there is more freedom with owning your own Contracting business and it can be much easier to sell in the end.