Franchising Versus Starting Your Own Entity

My personal opinion is that unless you are an expert in the field you’re going to be entering and you really know this industry well, starting a franchise is a far more productive venture with a higher rate of success. The failure rate among small business owners is extremely high within the first two years of operations, while proportionately franchises are the inverted opposite.

Some things a franchise experience will give you are: management expertise in your industry, name recognition, marketing, and a host of other things the average small business just can’t afford. The biggest thing they will give you is a system. Just take a look at how well McDonald’s runs. They have systems in place for everything. While McDonald’s is a restaurant, they are designed so that a high school student can cook all of the meals they offer on their menu, unlike most restaurants that require highly specialized chefs and cooks. Since McDonald’s is well systemized, they achieve predicable results from millions of employees at thousands of restaurants worldwide.

The restaurant industry has the highest failure rates among small business. A common mistake people make when opening a restaurant is that they have never worked in one. To me it’s unbelievable someone would get involved in the business without at least first operating a similar business. Yet, I have friends who have made this mistake more than once. They open a restaurant, having never worked in a restaurant, don’t know how to cook, and really don’t know the first thing about the business. And then six months later, they’re shocked that their businesses failed. This is why my personal opinion is if you’re going to start a new business, having never been involved in a similar business, then you should buy a franchise.  Pay the premium upfront.  You will have long-term success.

Obviously, there is a premium you have to pay for getting involved in this franchise organization. The numbers really speak for themselves, as somewhere around 90% of all restaurants fail in the first two years of operations, compared to franchise restaurants having a 90% success rate. Not to mention an exit strategy if at sometime in the future, you want to sell your franchise.

The drawbacks to franchises are the significant upfront cost involved, and revenue sharing. If you’re doing this in a transitional stage of your life you may not want to put at risk several hundred thousand dollars for your business venture. There is however, an alternative to the franchise model, which also lends itself to many systems. That is the agency model, most commonly use is in the insurance, and real estate industry. There are many industries that lend themselves to this model. My first business venture with Hertz was an agency setting, I got all the name recognition and many of the upfront costs were covered by the Corporation. My responsibilities were scaled down from typical franchise. The upfront costs were minimal, and I was able to take advantage of the systems that were in place.

In this alternative you could look to the leader in the industry that you’re interested in getting involved and check to see if you could sell their product. If they have an agency model already in place or if you could implement a hybrid of working as an affiliate, this will allow you to take advantage of the systemized procedures that they’ve already done. Learn more about the industry. Of course there are disadvantages to franchising and agencies.  The disadvantages would probably primarily be in the amount of control you have over your operations, the corporate office will dictate what your office looks like, the products or services that you’re able to offer, and to some extent how much money you’ll be able to make. Alternatively, going out on your own, or starting a franchise. Especially if you’ve never endeavored into an entrepreneurial venture is a great way to get your feet wet, while the same time having systems and security in place.

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