Advantages and Disadvantages of Running a Franchise vs an Independent Business
Having worked both as a manager within a franchise and managed/owned my own independent businesses, it is striking to me that there are some major differences, as well as similarities, between the two business models.
Anybody wishing to set up a business should consider carefully what they want from their business and the most effective approach should be. The key play off when it comes to franchise vs own business tends to be between safety/support and flexibility/independence.
Below are what I believe to be the main advantages and disadvantages of running a franchise vs an independent business.
Advantages of a Franchise
Safety. You have the backing of a big organization who is established in your chosen business field, with all the operating experience that you need.
Marketing. Most successful franchise companies have already established that there is a desire for their product or service and established their brand. Franchise owners usually have comprehensive and detailed marketing plans, which would be difficult for a smaller outfit to put together in terms of time, money, and expertise. Your local franchise can tap into this.
An established brand gives you credibility with the public. A common brand assures customers that they will receive the same high standard wherever they use your services. In an independent company, it can take years to establish yourself in the public's mind as a trustworthy, reliable and rewarding service.
Computers and technology. Very few modern businesses can operate these days without a whole array of technical structures, such as promotional websites, online marketing, and provisions for ordering goods and services online.
Other help and support. Centralized telephone switchboards for taking orders for goods and services, as well as dealing with information complaints are useful. Automated and structured methods for recording your takings and expenses, ordering goods and merchandise for retailing etc.
Advice from experienced professionals. It is in the interests of the franchise to maximize revenue and they almost always have experienced professionals on hand to help the franchise operator to set up, run, and expand the business.
Training staff. Training can take up a lot of time and resources. The franchise owner can provide training services for your staff, such as learning sessions, handbooks, and online support for new staff.
Value. Although you have ongoing fees to pay to the franchise owner, you can often get very good value for money, when you take into account all the support and help that you are receiving.
Bulk buying power means that you will obtain many goods and services at lower cost than you would if you were operating an independent business. Contracts with other companies can also be set up at corporate level for maximum value.
Strength through size. A large franchise can be more resilient than a small independent business when it comes to dealing with competition from rival businesses, especially the bigger ones.
Some Stats About Starting a New Business or Franchise
• 25% of new businesses and franchises will no longer be operating by the end of the first year.
• 55% will have folded after 5 years.
• After 10 years, only 29% of business and franchises will still be operating.
Disadvantages of a Franchise
Less freedom. Much of the way that you operate will be effectively dictated by the franchise owner. This means that you have far less scope for your own ideas, innovations, and customization that you would have with an independent company. The goods and services that you offer, along with the way that you operate, are generally subjected to strict rules that you are contractually obliged to.
Contractual obligations. These can be a particular problem. Be aware of what you are signing up to. Legal contracts will hold you to doing things in a specific way, even if you want to do things differently. There will be lots of legal contracts too, if you operate as a local franchise.
Clash of interests. Franchises typically take a slice of the revenue. Franchise operators rely on profit. Although there is obviously a clear overlap between revenue and profit, they are not the same. The franchise owner may stipulate that the franchise operator undertakes tasks that provide revenue but are not profitable (typically because expenses reduce or outweigh the profit margin). This may help the franchise brand but undermine profitability for franchise operators. The operator may not be able to avoid undertaking unprofitable tasks because of contractual arrangements. For instance, the brand may offer a 24 hour service to customers. The individual franchise operator may be obliged to pay staff etc. to cover this service, even if it is unprofitable to be open at certain times of day.
There is more risk than you think. The truth is that there are some franchises that are potential gold mines, but many that are never going to make money no matter how well they are operated. There are numerous risk factors, including location, demography, staffing, marketing etc. If there was no big risk, the company would probably not choose a franchise model, they would set up branches themselves and reap the resulting profits.
The company is not structured primarily for your needs. The franchise will help you in places where your interests coincide, but will provide minimal or zero help in other instances. As far as the company sees it, individual franchises are essentially tools for generating revenue. They will choose how your local franchise operates, which services and good that you offer, and other things, such as how computer operated support systems work.
It swings both ways. Yes, the franchise brand and owner can help you. But if there are problems with the company at a national or international level, it can affect your own local franchise operation.
Summary: Main difference Between Operating a Franchise and an Independent Business
- The main trade off is between flexibility and safety/support.
- If you feel confidant at establishing your brand, as well as have knowledge/experience when it comes to starting your business up and running it, then you may well be better off with an independent company.
- However, it is important to take into account all the other factors. A small independent business is much more exposed and fragile than a large franchise, when it comes to competing with rivals.
- A franchise will have a detailed marketing strategy and bigger buying power. They typically provide many common services to local franchises for a relatively low cost, services such as training, help desks, online retail, telephone call centers, interactive website, etc.
- The decision over which to opt for, at the end of the day may, well come down to local knowledge regarding the (potential) strength of demand for products/services, the strength of the competition, and the costs of the start up and ongoing operation vs revenue.
Questions & Answers
What is an independent business?
It is a business that is free from outside control. Independent businesses are usually privately owned. Non-independent businesses include public limited companies, which are owned by investment shares traded in the stock market and therefore subject to the wishes of shareholders. Business franchises are also subject to outside forces, as they have to take into account the needs and wishes of the individual or group who granted them the franchise.
© 2014 Paul Goodman