Why Choose Franchise Ownership over Startup Business

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Photo courtesy of Black Hills Web Works

It’s an exciting moment when you’re ready to enterprise your way into the business world. People often look into business ownership to increase their financial security and to be their own boss.  With these motivators, why would anybody choose to buy a franchise rather than start a business from scratch? Purchasing a franchise means paying someone $30,000 and royalty fees– money which could go into your pocket.

People choose to franchise for many reasons. First and foremost, starting a business from scratch is risky and there are statistics to back this up. In the Emyth: Revisited, Michael Gerber states that 80% of start up businesses fail within the first five years. That’s 29% higher than the number of Americans who get divorced. However, when you buy a franchise, that risk of failure drops to 20 percent.

There are many factors that contribute to this latter statistic. I’m only going to discuss four:

We’re on the same team. At first blush, royalty fees seem like a one way street where the franchisor makes their profit off your hard work. It’s important to understand that royalties increase as your sales increase. So, yes, the franchisor does profit in the long run from you buying a franchise. However, his success is contingent upon your success, making him personally invested in giving you the support to help you succeed.

Technology. The majority of small businesses can’t afford the tech support they need to help their business grow and compete with big businesses. In my business experience, we’ve spent hundreds of thousands of dollars developing cutting edge software to run our company. Not only did this cost a lot of money, but it also shifted our focus and resources on tinkering and outsourcing in order to get the software right. Start-up businesses can’t afford to divert their attention from the sales and customer service that will keep their business running.

Network. While it’s true that anyone can expand their network to learn from other industry professionals (especially with access to Google+, Twitter, and Facebook), being part of a franchise network includes you in a community of other franchisees whose mistakes and successes you can learn from.

Branding. When you buy a franchise, you receive a piece of a very large pie. For instance, this year, Coca Cola is estimated to be worth $68 billion. McDonald’s is estimated at $32 billion. (Check out this article http://www.interbrand.com/en/BestRetailBrands/2012-Best-Retail-Brands.aspx to see the value of the world’s top brands) Brand power is made by a symbiotic relationship between franchisor and franchisee as they work together to build that brand and increase the size of their pie.

Having turned a start up business into a franchise, I have watched our franchisees avoid many of the hurdles my partners and I have had to overcome simply because they are part of an established system.

 

Scott Abbott

CEO, Five Star Franchising

www.fivestarfranchising.com

 

 

Financial Alignment Between Franchisees & Franchisors

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Alignment. This is one of those words you will hear very often at your local car repair shop. If your alignment is out, you will find that the steering wheel doesn’t seem to go where you want it to go. Whether it shakes or pulls left or right is really a symptom of what is out of line and how bad. The wear and tear on a vehicle like this is constant, and you will find that tires go more often and the cost of misalignment adds up over time.

Business is very similar, and partnerships require perfect alignment if you want to stop a partnership from becoming a sinking ship. In franchising, it is critical that the franchisees, and franchisors understand each other’s goals, and earnestly put forth best efforts to help each other achieve them. If not, you will find that the direction you want to go will be consistently thrown off by the direction your partners want to go. This wastes both valuable time and resources.

I would like to speak to one major issue in franchise alignment that I have seen come up time and time and again. Every franchisee pays a royalty to the franchisor. This royalty is calculated on the gross sales of the franchisee and is taken off the top regardless of profit levels. The danger in this is some franchisors only look at the top line revenue as the goal, as that is what drives their profitability, while the franchisee goals might be more about what hits their bottom line. This misalignment creates friction in a partnership if both parties are not equally committed to each other’s goals. I have seen some franchisors demand massive investments in marketing and advertising to drive that top line growth, only to see profits erode if not disappear on the bottom line.

When choosing a franchise system, it is critical that an open conversation on this topic is addressed and you feel comfortable that your partner has your best interests at heart.

Finding a Match

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When you look at your life, making matches are some of the most important decisions we will all make. Think of the matches you have made to date (and I am not talking about coordinating clothes for a big date). As a kid, your first choice might be finding a sport to participate in that matches your interests. As you get older, then face matching your higher education to fit your career aspirations. And what about discerning whether or not you’ve found the right person to date, let alone marry? The list could go on and on but I think we get the point: the matches we make in life can either change or sour the directions we take. This principle applies to more than milestones, but to our businesses as well. When looking to buy a franchise, it is integral to find one that matches your needs, resources, and aspirations. One of the best ways to do this is by working with a business consultant.

Some may not feel they always have the control over whom or what they end up matching with. But the reality is that we do, we just might not know where to even find the perfect match. For instance, if you wanted to meet new people you might go to a dating site, friend or club to facilitate the opportunity. In the business world, there are networking services that facilitate similar opportunities. But what if you are starting a new business or changing your career? What are the matching services for finding the perfect business? While most people have heard about cupid.com, they may not know that there is a plethora of matching services for those looking to own their own business through buying a franchise.

Business consultants provide such matching services, helping you navigate throughout the complexities of the business search process. They can target your needs, supplement your skills, and introduce you to franchise possibilities you hadn’t considered before. A business consultant can help you not only find a match but can also help it prosper through financing opportunities, formulating a business plan, and generating an analysis of what you can expect. Finding the right business consultants can be one of the most important matches you ever make because of the resources they provide in finding a franchise to invest your money in.