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Buying A Franchise Versus Starting A Business
Starting a business can be an exceedingly rewarding endeavor. From its inception you have complete authority on all decisions big and small - something as imperative as planning a restaurant menu, for example, to choosing what color and style of blinds to hang in the windows, you control everything. Additionally, for those lacking the start-up capital to purchase or rent a location, you can start a business from home with little more than a computer with Internet access. As attractive as this autonomy seems, however, starting a business from scratch is not without pitfalls. For instance, there are high failure rates for new businesses. It takes time and effort to develop your business plan, secure financing, acquire the necessary licenses and get a clientele base.
Indeed, it is wise for new business owners to have six months to one year of income set aside to subsist on while the business gets its footing. And, unless you have a wholly unique business idea, you will likely find yourself in competition with franchise businesses that enjoy vast brand awareness and customer loyalty. This brand awareness is one of the major pros of buying a franchise business. You will be working within a proven system and enjoy instant brand awareness and credibility. Additionally, a network of support is available to franchisees.
This includes technical and managerial support from individuals who are knowledgeable about your specific business as well as the benefit of shared marketing. And, if another franchisee in your area airs a commercial or sponsors an event, it stands to reason that your franchise location would share in the customers purchased by your neighbor’s advertising dollars. All of these facts add up to a quicker return on your investment because your franchise business is recognized from the moment you open its doors for the first time. Also, should you find that you are enjoying great success with your franchise business; expansion is far easier with franchises than with a small business. Finally, if it’s the food, hospitality or retail industry in which you’re interested, franchise businesses have a much greater success rate in all of these areas. Despite all of these redeeming qualities, a new business owner should remember that a franchise business is not a guarantee for success, and the start-up can be quite costly. A franchise business requires the same initial investment as a new business where location, supplies, inventory and employees are concerned, but it has the added cost of a franchise fee which varies widely but can be as much as several hundred thousand dollars. Franchise Red Flags Entrepreneur.com lists five red flags that should alert a new business owner to a potentially poor franchise choice: One is the franchise’s litigation history, which must be made available to prospective franchisees in the Uniform Franchise Offering Circular, or UFOC. A new business owner should look for how many cases the company has been involved in with franchisees.
Anything greater than one or two cases per hundred franchisees is cause for concern. Second, you’ll want to examine the turnover of units in the company, also available in the UFOC. How many franchisees have left the company and why? Was it due to failure or the sale of a successful unit to a new owner? The answer to this question can help determine—at least partially—how successful you might expect your unit to become. Another factor that should disquiet a prospective franchisee is, after sincere research, an inability to come up with any substantial numbers concerning things like sales and profits. If it seems that this issue is skirted around, another franchise may be a better option. Additionally, before buying a franchise business, you should ask around about the relative happiness of other franchisees. Talk to other franchise owners. Are they happy with the support provided to them by the company? Are they pleased with the success of their own units? A preponderance of unhappy franchisees suggests that you may be unhappy in this franchise as well. Finally, although it seems simple enough, a brief look into whether your cultural and moral values mesh with those of the franchise might be easily overlooked. Is the franchise run by individuals whom you deem to be honest and that share your ethical guidelines? If not, it may be a difficult system in which to work.
Top Franchises of 2007 The Franchise 500® is a list compiled by Entrepreneur.com using the same criteria to judge each company, no matter what the size. These factors are “objective and quantifiable” and include, but are not limited to, the company’s financial strength and stability and the growth rate and size of a company. Entrepreneur.com examines the start-up costs for each franchise, the length of time the company has been franchising, as well as some of the factors on their red flag list, particularly litigation and turn-over rates. They find out whether the company provides financing and use an independent CPA to audit its financial data. They insert all this data into an exclusive formula and assign each company a cumulative score. Then, the companies are simply ranked based on those scores. Just a few of the franchises you’ll find on the Franchise 500® are: UPS Store/The Mail Boxes, Etc., Liberty Tax Service, Super Cuts, Two Men and a Truck, Golds Gym, Arby’s, Microtel, Beef O’Brady’s and Chem-Dry Carpet, Drapery and Upholstery Cleaning.
While the Franchise 500® can be a valuable resource for someone considering buying a franchise, Entrepreneur.com does not evaluate subjective criteria, and these areas—such as franchisee satisfaction—will need to be researched independently.
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