The Choice Is Yours
Should you buy a franchise, a business opportunity, or go it alone? Don't leave this important decision to chance.
Do you want to be an entrepreneur. Just how do you get started? This is the question facing almost anyone looking to get into their own business, and there are basically three answers: Buy a franchise, invest in a business opportunity, or start an independent business from scratch.
Franchises appeal to those who need more structure and support when they get started, and who are looking for an established business name and mode of operation. Business opportunities are more for those looking to ease into a business--something that can be started as a sideline and that comes with a set of instructions on how to begin. Independent start-ups appeal to more self-sufficient and aggressive people--folks who know they like to do things their own way, right from square one. Each option offers different advantages, but the key to making the right choice is to "know yourself first."
As the president of the Venture Association of New Jersey, a business-networking group, and a senior partner with the Morristown, New Jersey-based Trien, Rosenberg accounting firm, Jay Trien has been both an entrepreneur and an advisor to many small businesses. Trien says that those more independent in nature are best served by independent start-ups, which are essentially riskier but give a bigger potential payoff, while those more cautious and bound by rules are more likely to succeed if they play it a little safer by investing in a franchise.
"The classic example is the two guys who started a personal-computer business; did they know they would build Apple Computers?" Trien says. "The opportunities are unlimited with an independent start-up, but you've got a lot more at risk, too, because you've got to learn everything on your own."
Interestingly, Trien says that potential investors are often attracted to independent start-ups because of the nature of entrepreneurs who start a business from scratch. He says that people starting their own business are often attempting to prove themselves right about an idea, and the enterprise becomes an outgrowth of that personal process.
"Their business is an extension of their personality or their emotional needs rather than just a way to make a lot of money," Trien says. "Most venture capitalists I know like those types of entrepreneurs better than the guys who just want to get rich quick. If the energy of someone who wants to prove their idea is right can be harnessed to basic business disciplines, that enterprise can be very attractive to investors."
Glen Weisman explored the fine points of dealing with suppliers in the December issue of Business Start-Ups.
What It All Means
Legally, in order to be considered a franchise, a franchisor must charge franchisees a fee for the right to offer certain products or services using the franchisor's name, trademark and service mark, and require the franchisee to operate and market the business according to the processes and standards set by the franchisor. The franchisee also receives access to ongoing corporate support.
A business opportunity offers the buyer, or licensee, a chance to begin a business selling or leasing the goods or services of the licensor, usually with the guidance of a proven operating system or marketing program. The parent company sometimes offers start-up assistance or ongoing support.
Starting a business from scratch entails presenting your idea, product or service directly to the buying public. Your business may have a retail storefront, be based in your home, or be operated on an on-site-service or door-to-door basis. You must secure your own financing, develop your own sales and marketing strategies, and create a business plan.
Trien looks at franchising as the other side of the coin. He describes franchising as a two-way opportunity: Franchisors get the opportunity to grow without the massive capital expenditure required to form a chain, while franchisees get a proven way of doing business.
"A franchise is relatively safe, but not every franchise is safe," Trien cautions. "In many cases, franchisees simply bought themselves a job. The guy who is a successful corporate soldier, who was willing to become subject to a `totalitarian regime' because it promised him protection, wants to be part of a strong franchise organization where they're going to tell him how to march.
"People do get a lot of information and a lot of help from legitimate franchises," Trien continues. "The danger is that there are franchisors out there that don't have the capacity to fulfill their own plan, and there are a bunch that are themselves undercapitalized. You could be part of a franchise that dies; that is part of the entrepreneurial risk. It's not a risk-free decision."
John Reynolds, executive vice president of the International Franchise Association, a nonprofit organization in Washington, DC, disagrees, saying that franchises are much more likely to succeed than independent start-ups because of the evaluation process an entrepreneur must go through before buying into a franchise opportunity, and because of the business structure and support franchises provide to new franchisees.
"The reason that most franchised businesses tend to have a lower failure rate is that most franchise companies do a better job of financially qualifying the franchisee before they start the business," Reynolds says. "The reason that most independent businesses fail is due to inadequate capitalization--which means that people don't have enough money to live on while they're getting their businesses off the ground."
Reynolds questions statistics recently published by the Small Business Administration (SBA) which state that franchises have a success rate of roughly 62 percent over a four-year period, while independent start-ups succeed at a rate of 68 percent. He cites studies that place franchise success at a rate of 90 percent or higher annually, and at around 85 percent during a franchise's first five years.
"The SBA study tended to be out of line with a lot of other studies by the Department of Commerce or the Big Six Accounting Firms," Reynolds says. "The failure rate of franchises in those studies was a very low percentage, in the five-to-10 percent range annually. It's really hard to get data about franchised businesses that compares them to independent small businesses so you can make an apples-to-apples comparison."
Reynolds explains that franchises are also substantially different from business opportunities, in both the dynamics of operation and the support received from the parent company after investment.
"The shorthand, oversimplified difference, in most cases, is that with a business opportunity, all you get is a stack of business cards and the opportunity to go into business by yourself selling whatever it is the business opportunity is selling," Reynolds says. "With a franchise, you get a business system and the opportunity to go into business, not only for yourself but with the franchise system behind you. So you're going into business for yourself, but you're not by yourself."
Franchises generally require a substantial investment, which, Reynolds says, begins in the $25,000-to-$50,000 area and runs into the $500,000-to-$700,000 neighborhood, with the average start-up costing between $150,000 and $200,000. Reynolds says that with more than 65 types of business being franchised, the cost of investment is largely dependent upon the specific type of business.
Franchises that provide more overhead services, such as accounting, payroll and marketing services, or those with more intensive equipment requirements, are generally more expensive, according to Reynolds. He points to personnel services as an example of why franchises tend to have higher fees and royalties--because of the level of overhead services typically provided by the franchisor.
"You can select a franchise concept that is a mature system--one that's been in the business a long time, has a lot of franchises, a big market share, and some staying power in the marketplace--and you're going to have a more secure investment," says Reynolds. "Or you can choose a business that's a relatively new concept--one where they've been in business less than five years and have a smaller number of franchises. Your investment may not be as secure, but who knows--that may be tomorrow's big franchise success. So you've got that ground-floor opportunity. It depends on a person's financial goals."
DeeAnne Clowes became a franchise success story after relocating from Boise, Idaho to Atlanta. While contemplating a new career, she heard about Budget Blinds, a franchise operation that's been in the window-covering business for a little more than a decade. She looked at a few business opportunities, but a friend's success with a Budget Blinds franchise inspired her to buy one, too.
"I have a business and accounting background, and I was attracted to the way it was set up--that it had a structure to it, that there was a game plan, and that it all came in a package with company support instead of you being out there on your own trying to figure it out," says Clowes. Those factors and a start-up cost of around $12,000 made the endeavor attractive to Clowes, so she took the plunge.
Since the financial rewards are now going straight to her rather than to a boss or company shareholders, Clowes finds the hard work satisfying. Clowes' business has produced cash from the start, and has steadily grown to the point where she is realizing monthly sales of between $35,000 and $45,000 after just a year and a half.
"The experience has been wonderful. I thrive on it," Clowes says. "I don't think there are any drawbacks to a franchise. I know franchise owners who complain about paying royalties every month, but I don't mind. There is no way I could have done it without Budget Blinds' support. I used their office, their support and other franchisees (for information relating to the business) constantly when I started out."
The Franchise Pros:
- Statistically, there is a low failure rate in the first five years of operation.
- National and local advertising programs are provided for you, with costs covered by your franchise fees.
- There is strong, continuous corporate support after the purchase.
- Proven operational systems remove the guesswork from starting a business.
- A substantial initial investment is required, generally more than $10,000.
- Ongoing fees or royalties must be paid to the parent company.
- Rigid operating guidelines, as set by the franchisor, must be followed.
- International Franchise Association
1350 New York Ave. N.W., #900
Washington, DC 20005
- Individual franchise sellers
(Federal disclosure regulations force franchises to make a wealth of information available to potential investors.)
According to Andrew A. Caffey, a franchise and business-opportunity specialist who practices law in Bethesda, Maryland, the lack of a continued relationship between the seller and the buyer of a business opportunity, and the supplying of a business "blueprint" for the buyer to follow with no rigidly enforced operating structure, are the most basic characteristics that distinguish business opportunities from other types of businesses. He says business opportunities are generally kits describing how to get started in a certain business, sometimes providing a buyer with a product-distribution network. The price for a business opportunity is typically in the $500-to-$5,000 range, he adds, though they can be priced much lower or higher.
"The major reason to opt for a business opportunity over a franchise is independence," Caffey says. "A business-opportunity buyer can operate independently and is not going to be required to operate under the restrictions that a franchisor is likely to impose."
Caffey says that, while business opportunities are not as diligently regulated as franchises, regulations exist at the federal level and in 25 states that apply to business opportunities. However, many of these regulations don't apply unless the purchase price is at least $500.
The value of business opportunities can be found in their two basic components, according to Caffey: the distribution networks, which give business-opportunity buyers access to products or services being sold by business-opportunity sellers, such as specialty items or information services; and the instructional components on how to get started with the business opportunity.
Business opportunities can be found in magazine advertisements or at business-opportunity trade shows, but there are no agencies or associations to make researching business opportunities easier, Caffey says. The lack of a national organization among business-opportunity sellers and their lack of ongoing contact with buyers are the chief reasons Caffey cites for the difficulty of judging their success rates.
"A good business opportunity is packaged and thought out for you in advance, and doesn't require a large investment or continuing royalty payments," Caffey says. "The downside is that it may not be a business that is a good fit for the buyer. Making that decision is where the magic is. Make sure this is something you want to do, and something that will fit with your personal style and budget."
Finn Skeisvoll found a business opportunity that fit him perfectly. A Norwegian immigrant who was working as an electrical engineer, Skeisvoll decided to invest in a business opportunity, distributing products provided by Specialty Merchandising Corp. (SMC), a high-volume gift importer and business-opportunity seller located in the Los Angeles suburb of Chatsworth, as a sideline to his regular job. Eventually, the business opportunity grew into his primary livelihood and provided him with a lifestyle that he says he couldn't have enjoyed on an engineer's salary.
"I always wanted to get into something of my own. It was my dream," says Skeisvoll. "I saw a few ads and investigated a few companies, but I decided that I liked SMC. They had a location close to my job, and they had a showroom where I could check out the products."
The attractive cost of becoming a distributor, which Skeisvoll remembers being around $100 when he started his business 25 years ago, was one of the factors that attracted him to the business opportunity. Skeisvoll acknowledges that his own independent nature was another factor that made the business-opportunity relationship attractive to him. From this relationship, Skeisvoll started Scan-Am Enterprises, a company that provides novelty items to several large mail order clearing houses, including such giants as Carol Wright and Fingerhut. "At first, I didn't have to come up with much start-up money," he says. "I was still working my regular job, and this was something I could easily do on the side."
Skeisvoll had no real business experience, outside of a few business classes he had taken in Norway, so the learning was done on his own. The local library became Skeisvoll's basic research tool; there, he came across directories of mail order companies, and he decided to pursue them as prospective clients.
"You have to be inventive and save money as you go along," Skeisvoll says. "I've been very, very fortunate. I have only good things to say about it. It's absolutely better than my career as an electrical engineer."
The Business Opportunity Pros:
- Business opportunities have relatively low start-up costs, usually falling in the $500-to-$5,000 range.
- Generally, there are no continuing royalties or fees to be paid.
- Your business will be selling a product and using a system of operation that have already been proven.
- The product or service may not have a brand name which your potential customers will recognize.
- Often, there is no system of support following the purchase.
- Currently, there is a lack of information on the success rates of business opportunities, making them harder to research.
- Dun & Bradstreet (for reports on individual business opportunities)
1 Diamond Hill Rd.
Murray Hill, NJ 07974
- Better Business Bureau
- Federal Trade Commission
San Francisco-based business consultant Paul Terry says that the people he helps to start their own businesses are intent on doing things their own way, and believe it is less expensive to start from scratch than to buy a franchise. They also head into an area of business they have experience in or strong feelings about, and look at their business as a personal challenge.
Terry describes new entrepreneurs as people who "tend to have a passion because they're doing something they really like, and they tend to have a background in that particular area because it's a hobby, or it's an idea they've originated. So they tend to start their own business. People who choose a franchise feel that they are buying an existing turnkey process which has less risk, so this is an attraction to them."
Two years ago, Denise Martineau started tricom systems, an Oakland, California-based computer-consulting and technology-planning company, in order to pursue a type of business that captured her interest. A scientist by training, with an undergraduate degree in chemistry and graduate work completed in chemical physics, Martineau began her business with no formal business background.
"It's much better than any job I've ever had, in terms of fun and in terms of money," says Martineau, who started her business without really looking at options like franchising or business opportunities, and basically learned about business on her own, through trial and error.
"The biggest asset for me is having control--over my environment and over my work," Martineau says. "I've found being in business for myself to be very rewarding. You have to be self-disciplined, and you can't be afraid of--or in need of--authority figures. It's the work itself that makes you work--you don't need some kind of outside force that makes you work.
"There's a certain amount of self-understanding that you have to have; you have to understand what motivates you, and you have to understand what it is about being a start-up that engages you," Martineau explains. "Some people are engaged by the idea of making a lot of money. I'm engaged by the idea of creating an environment where I can pursue my own interests."
During the start-up phase, Martineau turned to San Francisco Renaissance, a business incubator and educational center for entrepreneurs. She found their training extremely helpful in providing her with a framework for launching her enterprise. She also suggests MBA programs with entrepreneurship training classes, independent business associations or groups, books, periodicals, and accommodating professionals as good resources for people seeking to start their own business.
"I'm having a good time, I'm making more money than I've ever made before, and I've reached a new level of prosperity," Martineau says. "I really like the idea that I am creating jobs for people, and not just minimum-wage jobs. I feel like I'm pumping a lot of money into the economy, and that really adds to my enjoyment."
In the end, getting into business --in any format--requires a lot of honest self-reflection and self-assessment. Making the decision between a franchise, a business opportunity or an independent start-up remains a matter of personal choice and comfort. Weigh the pros and cons of each choice before making your final decision.
The Independent Start-Up Pros:
*There are no strict company guidelines that must be followed. You have the freedom to make your own rules.
- There is a greater opportunity to build equity.
- There are no predetermined start-up charges, continuing fees or royalties to be paid.
- Independent start-ups statistically have a lower rate of success than franchises or business opportunities.
- There is no main office or corporate headquarters to call for advice or support.
- It will be necessary to secure your own financing.
- National Federation of Independent Business
53 Century Blvd., #300
Nashville, TN 37214
- Local business incubators
- Small Business Development Centers
Andrew A. Caffey, 3 Bethesda Metro Center, #700, Bethesda, MD 20814, firstname.lastname@example.org.
Budget Blinds, 2265 Rose Walk Dr., Alpharetta, GA 30202, (770) 887-9309.
International Franchise Association, 1350 New York Ave. N.W., #900, Washington, DC 20005, (202) 628-8000.
Paul Terry, 185 Arkansas St., San Francisco, CA 94107.
Venture Association of New Jersey, P.O. Box 1982, Morristown, NJ 07962-1982, (201) 267-4200, ext. 123.