Franchise or Independent Business or Startup???
Happy September from Florida!
Where it’s still hotter than hell, humidity so thick that you can scuba dive through it, and where the mosquitos can carry off small children.
But with that, Let’s Do This!
Franchise or Independent Business or Startup???
Three entirely different investment animals! How do you decide?
Q: How do you make a small fortune in Start-ups?
A: Start out with a large fortune!
Let’s just get the startup thing out of the way first. Creating a successful startup is tough! Ask me how I know. Wanna see the scars??? Unless you have the cure for cancer or a working prototype of the DeLorean Flux Capacitor, it’s tough. Don’t just take my word for it and take a look at the statistics…(a classes I didn’t sleep through in college!). The Small Business Administration, SBA, stated that 22% of startups fail in the first year, 30% in the second year, 50% by the fifth year, and 70% do not live past 10 years. I don’t know about you but if it is my hard-earned money that is being invested, I sure want the statistical probability of success to be a lot better than that!
So how do you lower risk and increase the probability of success? Your next step is looking at a franchise or independent business. I’ll dive into a few specifics in a minute but a report by the US Bureau of Labor Statistics, BLS, stated that franchises have a higher statistical probability of success than that of acquiring an independent business. Let’s take a look at 5 business characteristics and some of the pros and cons of franchises and independent businesses.
1 - Business Model/Risk/Stability
Franchise: Ever wish that your football team could start the game on the 50 yard-line instead of the 20? Well, you get to do just that with a franchise! Franchises move the ball up to the 50 by providing tested and measured systems and processes. They have already shed the blood, sweat, and tears so you don’t have to. A well-established franchise has tested, measured, pivoted, and iterated to become the success that they are now. They give you the Playbook! Better yet is that you get the full story in accurate financials. More on this in a minute. Bottom line is that this does offer lower risk due to having an established brand, operations, marketing, suppliers, and ongoing support.
Independent Business: Acquiring an independent business makes it yours, all yours, and nothing but yours. You can do what you want, how you want, where you want, and when you want. But, it’s ALL on you. If you have the experience and mindset to do it, that’s great! You have the freedom to build an established business into a cash flowing machine. That is provided that you know what you bought. Remember when I said you get solid financials with a franchise? This may not be so in an independent business. I looked into buying a home services business and was provided the financials by the current owner. Long story short, they looked good but I wanted to dig deeper. Trust but verify, right? So, I asked for bank statements and tax returns and was told by the owner to “Go kick rocks”! Not exactly what he said but you can figure it out. This doesn’t happen all of the time but with independent businesses and you may incur additional risks throughout the acquisition process.
2 - Brand Recognition/Marketing
Franchise: When you buy a franchise, it’s like being in a family. You share your name, your values, and your reputation. That’s great, as long as those things are good. Choose wisely. And actually, that’s how we help! …(insert shameless BridgeWay Franchise Advisory plug here). Having a great name, reputation, etc., is a major asset in that your franchise already has this asset in the books. This will attract your target market from day 1 and lead to faster sales and cash flow. You will also benefit from the franchisor’s national, regional, and also local marketing efforts. This includes television advertising, promotional materials, and social media campaigns. This saves you time, money, and effort.
Independent Business: Acquiring an independent business means that you will need to create your own unique branding from scratch and/or utilize the current owner’s brand and marketing. If the latter carries positive recognition, this can work in your favor. You may even get a current book of customers and receive immediate cash flow providing you verified this in your due diligence. While starting from scratch is great if you want to create a unique brand, it will also require significant time, money, effort, and resources to gain customer trust and recognition. This can be a challenge unless you have resources and experience in these areas.
3 - Training and Support
Franchise: How about a Playbook and a Coach? Remember, great franchisors have “been there, done that” and knows what works best for their business and in their industry. Great franchisors typically offer comprehensive training programs, both live onsite and online, to help franchisees understand the business operations, sales process, marketing campaigns, customer acquisition, human resources, bookkeeping, insurance, suppliers, and so much more. Some even provide a coach or consultant that will come to your place of business to help get you up and running and will schedule ongoing visits to help you stay on track. One more very important thing they offer is access to other franchisees that are already established and are glad to help you succeed.
Independent Business: When you acquire an independent business from an owner, the only thing you may get is a desk, a phone, and their best wishes. But often, you can make an arrangement in which you can retain the owner to serve as a consultant to provide an onboarding that may lead to a smoother transition. Here’s a quick tip, make it your mission to see that the buyer has a vested interest to help. This will be a finite timeframe so when it ends, you will need to know how to swim without the life vest.
4 - Operational Control
Franchise: I know what you’re thinking. It’s been all rainbows and unicorns on the franchise side of things. So here you go. Even being given the Playbook, systems, processes, and training you still have to play by their book. Each and every franchisee must operate within the rules, guidelines, and standards set by the franchisor. This can put the brakes on any autonomy in decision-making that you thought you may have. But they do this for a reason. They know what works and it ensures consistency and continuity across the entire brand. Now that being said, most do allow some autonomous decision making especially on matters pertaining to local issues. After all, you know your unique market as well as local and State rules and regulations that must be followed.
Independent Business: It’s yours! Owners of independent businesses have complete control over operations, and everything else for that matter. This allows for quick and flexible decision making. This autonomy allows the owner to respond rapidly to industry and market changes, HR issues, purchasing, pricing, technology, and customer service needs. But on the flip side, it also means you will assume full responsibility for all business outcomes. If it works out, you get full credit. If not, there’s no one else to blame.
5 - Exit Strategy
Franchise: Selling a franchise can be easier due to the established brand and business model. Potential buyers may be more interested in a business with a proven track record and recognizable name. You also have a ready list of potential buyers that are current franchisees looking to acquire additional territories. Franchisors may also provide support during the resale process.
Independent Business: Selling an independent business can be more challenging as it requires demonstrating the business’s value and potential to prospective buyers. However, if the business is successful and has built a strong brand, it can attract higher multiple of EBITDA and offer more flexibility in negotiating the terms of the sale.
Of course it’s not all as simple as this. Do your due diligence and research and have a good understanding not just of these business models, but of your own personality, experience, and goals. Business ownership is great, but not for everybody.
And that’s all for now! Thanks!
Hey, One More Thing…
Have you have ever dipped your finger in the peanut butter jar for a taste when no one was looking?
If so, click the link below to schedule a 15-minute introductory call and let’s chat about business!
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John Chason has spent his entire his career as a consultant, entrepreneur, and investor. He has excelled in providing advice to other entrepreneurs and investors including startups and venture capital firms to create funding partnerships. Continuing in that tradition, John is still consulting and advising investors and entrepreneurs in discovering the best franchise to help them reach their goals and dreams.
