Biz Talk: Should You Get a Franchise Instead?

Building your own business from scratch can be very stressful, especially if you do not have any idea how to do it. You have to handle every aspect of the business: sales, marketing, hiring, training, operations, customer service, administrative, legal, technical, etc.  

You will also have to define your business concept, product, target market, policies and procedures, and determine your capital, cash flow, location, promotional strategy, and so on, usually by trial and error.

If you want to avoid the hassle and cost of making more mistakes than necessary, buying a franchise may be a better option for you to start your own business. It’s like buying a cake mix — the ingredients and their proportions have already been tried and tested, so you minimize the error in measuring and mixing.

What is a franchise? It’s a legal and commercial relationship between the franchisor (the owner of a trademark, service mark, brand name, or advertising symbol) and the franchisee (an individual or organization wishing to use that identification in a business).

The franchise governs the method of conducting business between the two parties. Generally, the franchisor supplies the goods or services and maintains corporate standards by monitoring the quality of distribution or delivery.

Franchise opportunities let you go into business for yourself, but not by yourself. When you buy a franchise, you actually buy a business concept or strategy that has already been proven to be successful in most cases under normal circumstances, i.e., without any catastrophic or tragic event. It is like paying somebody to develop a business model, a marketing strategy, efficient method of operations and a management system that reduces your learning curve and increases, but does not guarantee, your chances for success.

A franchise provides you with the following: an established brand and customer base, marketing support, reputable suppliers, management and technical training, financial assistance, trade secrets and proprietary methods, and continuous research and development.

However, a franchise also has the following disadvantages: large initial cost (franchise fee and start-up capital), royalty payments, marketing and advertising fees, limited creativity and flexibility, restricted sourcing (from approved suppliers only) and commitment to a long-term contract.  

So how do you choose which franchise opportunity is for you? Do your homework — lots of research.

First, determine how much capital you are wiling to invest. Initial fees can range from $1,000 to more than $200,000 plus other typical start-up costs like real estate and equipment. The cost of a franchise depends on factors such as the size of the industry and the location of your franchise.  

In order to become a franchisee, you have to pay a franchise fee, which generally starts at less than $10,000, but can potentially exceed $100,000.

The average franchise fee runs from $20,000 to $30,000, and each franchisor has its own set of financial requirements a franchise applicant must meet to qualify. The average royalty fees range from 3 to 6 percent of monthly gross sales, while the average franchise contract lasts for 10 years.

After examining costs, identify which type of business best fits your personality and lifestyle. List three businesses you would like to get into. Gather information about earnings, support and costs by interviewing franchise owners of those businesses.  

If possible, get to know them personally to find out if their earnings expectations were met and if they are happy with their decision to own a franchise.  

Before starting CoffeeShop Treats,* I looked at several franchise opportunities like Baskin Robbins, Mrs. Fields Cookies, Tapioca Express and Loard's Ice Cream.  

However, none of those would allow us to incorporate all the creative ideas we had put together in the business plan. To help you shortlist potential franchise opportunities, Entrepreneur.com has identified the top ten industries to watch — franchising trends for 2011.

If you are not confident enough to start your own business from scratch, or you want to skip the tremendous pressure of pulling together all required resources and coordinating all people involved in the initial stage of operations, you will be better off buying a franchise.

But if you are the entrepreneur who loves the challenge of developing your own concept, brand and systems, then you may be able to start a business which can be later sold as a franchise.

*CoffeeShop Treats LLC, a bakery cafe business, was sold in 2007.