Small Business

The Pros and Cons of a Franchise


By Karen E. Klein Q: I am thinking of opening a small business and wondering whether to go independent or buy a franchise. Can you give some of the pros and cons of each approach? -- B.D., Maple Park, Ill.

A: Becoming a franchisee has many advantages over starting a new business on your own -- but be warned, the life of a franchisee is not for everyone. The deciding factor, experts say, is honestly assessing how independent you want to be in your business. Do you enjoy being in charge? Do you chafe at advice, rules, and restrictions? Do you yearn to try new approaches to growing your company, and hope to experiment with

advertising, customer support, new products, and distribution channels?

If you have a true entrepreneurial personality, you may want to think twice about franchising. Do not go into any franchise program thinking you'll have much control," franchises provide you a list of what you can and cannot do in order to maintain consistency. With your own independent business, no one provides any controls on you, for better or worse.

"ENTREPRENEUR LITE." "Franchisees often think of themselves as entrepreneurs -- but they are not," says Michael Seid, a food and franchising consultant based in West Hartford, Conn. "They are more like 'entrepreneur lites.' Entrepreneurs want to start new businesses and they want to make their own decisions. They like to experiment and have a need to operate and market their business based upon their own vision of how things should be done."

Franchisees, on the other hand, are provided with a system and standards on how to operate the business -- and they are contractually obligated not to deviate from them, says retail consultant Bob Phibbs, of Long Beach, Calif. "A proven company has almost complete control of product, merchandise, advertising, etc.," he says. "This cuts the learning curve for new business

owners. They know what has and hasn't worked in the past."

Once you've decided whether you yearn for total autonomy or crave

hand-holding and established systems, here are a few other factors that distinguish franchising from entrepreneurship:

Franchisees get the benefit of brand recognition, which ideally equates to an immediate customer base.

Most franchisers provide information on selecting a location and developing it, including layout, equipment, opening inventory, etc.

Franchisees get initial and ongoing training for themselves and their staff, along with continual support from the field and headquarters staff of the franchise.

Franchises are always doing research and development of new products on a scale that independent business owners cannot afford.

Franchisees get the benefit of national advertising and promotions, product distribution, national accounts, and critical mass in markets with other franchisees or company-owned locations.

"Probably the most important benefit is that a franchiser can project how much money the franchisee will need to get the business started, and how much working capital they will need to keep it going until it turns cash-positive," Seid says. "Most small startup businesses fail not because they have a poor product or service, but because they could not predict how much

money they would need and ran out before the business became profitable."

Independent businesses are privately held, which means that no one will be looking over your shoulder unless you invite them to do so. In a franchise system, however, you'll be expected to share information about your finances, revenues, and ongoing operations -- and you will be subject to periodic visits from a field rep to assess how your business is doing.

Independent businesses don't pay royalty fees to a franchiser, nor do they have to negotiate contracts with a home office.

An independent business owner is really her own boss. In a franchise, you'll be expected to work with other franchisees on decision-making, and you'll be expected to go along with the majority even when decisions are reached that you disagree with personally.

As an independent, you may benefit more from personal relationships with your customers, most of whom prefer to do business with people they know. You may also benefit from the "David vs. Goliath" image that small business projects, provided that you give your customers better product and service than the big chains.

Independent companies often have little time for employee training and ongoing review.

As an independent business owner, it's easy for your priorities to become muddied, and you will have fewer resources to ask for help in deciding where to spend your money and your energy.

An independent company has no immediate brand recognition, so it will take longer and cost more to build your brand. Have a question about running your business? Ask our small-business experts. Send us an e-mail at smartanswers@businessweek.com, or write to Smart Answers, BW Online, 46th Floor, 1221 Avenue of the Americas, New York, NY 10020. Please include your real name and phone number in case we need more information; only your initials and city will be printed. Because of the volume of mail, we won't be able to respond to all questions personally.


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