Want To Start A Profitable Business? Buy A Franchise

To become an entrepreneur, own one’s own business, and become a master of your own destiny is the dream of many Americans;  perhaps even the vast majority.  Alas, few people actually take the plunge and strike out on their own, most likely out of a fear of failure.

Start-up failure rates differ dramatically depending on who you ask, but one commonly-cited figure by Scott Shane at Case Western Reserve University pegs the one-year failure rate at about 25% and the 10-year failure rate a discouraging 71%.  That is,  one in every four start-ups will fail within one year and over 71% won’t exist 10 years from now.

Franchising = Entrepreneurship In A Bottle

With failure rates so high, it’s no wonder few ever walk the path of entrepreneurship.  However, most people don’t know that one specific form of entrepreneurship, that of buying and running a franchise, is far less risky and potentially just as profitable.  The same study mentioned above found that over the same 10-year period,  approximately 62% of individual franchises were still in business, an encouragingly high figure.

Why Do More Franchisees Stay In Business?

What accounts for these startlingly-different figures?  As it turns out, franchisees have a number of advantages over independent entrepreneurs that make their ventures less risky in the long term.

• Franchisees Get Expert Training And Support – The majority of franchising companies offer extensive upfront training and support of new franchisees.  Since franchisers are typically paid a percentage of profits, it is in their best interests to help their franchisees succeed.  The larger franchising opportunities such as Subway or Papa John’s require new owner-operators to go through an intensive training regimen before allowing them to open their first store and offer ongoing assistance and marketing support.  Even most smaller franchisers offer their people meaningful support.
• Franchisees Buy A Business Model, Not Just A Brand – The #1 reason franchises tend to survive longer and be more financially-successful than independent businesses is that you aren’t just buying the right to use a certain brand name, you are buying a proven business model.  For example, Subway franchisees aren’t just buying a type of sandwich or a brand name but a business formula that has already been successfully replicated thousands of times all around the country.  Subway’s business model simply works, and franchisees are buying the right to do business the Subway way.
• Collective Bargaining Power With Suppliers – Continuing the example above, the Subway corporate office has a financial incentive to help its franchisees obtain supplies and inventory as cheaply as possible.  The buying power of thousands of stores all over the country buying and selling as a unit gives them a level of bargaining power no independent sandwich shop could ever hope to achieve on its own.
• Professional Support – When you buy a franchise, you’re never alone.  If you have a problem or a question about the best way to do something related to the business, you have a network of hundreds of peers all over the world to offer you advice.  Furthermore, the majority of larger franchisers offer one-on-one training and support.
• Franchisees Are Well-Capitalized – The most over-looked reason franchises tend to have a much higher survivor rate is that the type of entrepreneur in the market for franchise opportunities tend to be well-capitalized.  Under-capitalization is the #1 killer of small businesses, and most franchisers have minimum net worth requirements that must be met before you’re allowed to buy in.

What Are The Disadvantages Of Franchising?

The disadvantages of franchising are straightforward.

• Lack Of Control – Your franchiser has the right to dictate how you do business, often down to what type of wallpaper you’re allowed to use.  If you aren’t okay with lack of control over that type of thing, franchising is not for you.
• Lower Long-Term Profit Potential – While franchises are probably just as profitable independent businesses on average, the possibility of knocking it out of the park just isn’t there with a franchise.  You can certainly earn a healthy income, but you aren’t going to be the next Microsoft and you aren’t going to take your business public for a cool $100 million payoff.
• More Difficult To Sell – It may be more difficult to sell a franchise than an independent business, especially if the parent company isn’t doing well.
• The Parent Company Could Go Out Of Business – If your parent company goes out of business, something you have no control over, you are probably screwed.  That’s why it’s important to choose a franchise with a strong, profitable brand with long-term appeal.
• Other Franchisees Could Give You A Bad Reputation – If another franchisee in your area (or across the nation) provides poor service or otherwise screws a customer, your image will likewise be tarnished in their eyes even though you had nothing to do with it.