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Alternative to buying a franchise

Should you buy a franchise, or start your own business? After reading this you may not be so scared to start your own.

Let’s assume you have decided to start your own "coffee and sandwich cafe" instead of buying a franchise. The franchise fee would have carried a $30,000 and a 7% royalty on gross sales. Here is one way to proceed with your business and fee savings:

  1. Take the $30,000 franchise fee and invest $25,000 in the market or real estate. With compound interest of 11% over 20 years, you’ll have over $201,000 nestegg to retire on. Take the other $5,000 and hire a franchise or business consultant to help you build out and set up operations.
  2. Let’s assume you’ll spend the equal amount on advertising as you would have with the franchise, say 4% of sales. Assuming your sales are $400,000, that is $1,333 a month on advertising. How about you spend that plus an additional $2,333 ($3,666 total) on local promotions and media buys to build your own brand awareness? You can with 7% or $2,333 royalty you’ll be saving. That can go a long way considering radio spots and many TV spots can be had for less than $100 per spot. Many small businesses would salivate to have a $3,600 advertising budget each month.
  3. By cutting out the premiums you pay to the franchisor for supplies and food, you can spend that money on an extra employee to help during high traffic hours or on creative consultants to help with advertising and promotions. In other words, you can invest that money in building a customer base.
  4. Take the franchise fee you must pay to renew your franchise every 10 years (some are only 5 years) and invest it in a consultant to help build your business further. Or, if you have been obtaining feedback and outside and you are certain there is nothing left to improve, use the money to pay yourself a bonus.
  5. Altenatively, if the business is stable and advertising has proven not to pay off, you can pocket some of the royalty money. But, I’d wait a few years until the business is well established.

What you are giving up by not buying a franchise:

  • a method to operating a business and buying inventory that has been shown to work
  • existing brand awareness
  • pooling advertising dollars with other franchisees
  • knowledgable resources (though they are obligated to maximize their profits, not yours)

What you gain:

  • Freedom in all aspects of operating your business, from site selection to operations
  • Easily sell the asset (your business)
  • Lower cost inventory (no franchisor markup or required suppliers)
  • Higher rate of reinvestment of gross sales into business
  • Investing the franchise fee can provide a nice retirement safety net

One big reason franchises succeed more often than startups is the franchisor requires discipline — discpline in capital requirements, discipline in advertising and operations. If you have the discipline, you can succeed on your own.

We report, you decide 😉

About Ryan Knoll

Attorney and advisor with an interest in franchising. Feel free to email me comments and questions on the "Contact Us" page.
2 comments
profitable franchise business opportunity
profitable franchise business opportunity

If you have always wanted to run your own business, but perhaps lack special training or entrepreneurial skills, the franchise business could be what you’ve been searching for. Buying a franchise business is simple. But what is not simple is choosing the right kind of franchise business. Before buying a franchise business, you must first make sure you clearly understand the dynamics of the franchise business, what a franchise business really is, and how it works.

FuwaFuwaUsagi
FuwaFuwaUsagi

I must say your thoughts mirror some of my own. One additional thought, I highly question (as have others) the so called success figures of franchises vs roll-your-own. One thing I have noticed is a lot of roll-your-own types are simply good businessmen and now how to cut their losses or when to reinvest. Stated differently a lot of good business men simply sell, close, or move on from marginal businesses and simply close unprofitable ones, take their losses and what is left of their capital and roll it into another enterprise. However what I see from franchisees is a sort of utopian ignorance which keeps them plugging year after year at a concept which due to royalties and aggressive advertising fees make them marginal at best. I guess it is the sunk costs in terms of non-recoverable franchise fees and high build out costs along with the "franchise promise" that keeps them going. All the best,