Franchise versus Independent Business

If it weren’t for franchising, many people with a thriving business would still be working for someone else.



“A franchise makes it possible for people who have never been in business before to run one successfully,” says Professor Lorelle Frazer, Director of the Asia-Pacific Centre for Franchising Excellence at Griffith University.


“Franchising makes the promise that the system and training will take care of the expertise – that all you need to add is the motivation, energy, salesmanship and drive,” adds Tony Arena, managing director of BCI Business Brokers.


But the first thing any would-be franchisee should consider is his or her own personality. “ A large, statistically-validated study we did found that good franchisees have very different psychological traits from people who succeed with an independent business,” says Frazer. “The franchisees tend to be risk avoiders and to have less confidence in their ability to run a business, so they like the security of a franchise.”


Successful franchisees have faith in the system and are prepared to follow it to the letter.


“Some people find having a franchisor worse than having a boss because of the restrictions the system places on you,” Frazer continues. “If you’re someone who wants to buy a coffee shop and change the menu, you should probably give a franchise a miss.” Franchisees should also feel comfortable with every aspect of running a business. “Some people are very happy to provide a service such as cleaning cars or washing dogs but dread having to find new customers,” says Frazer. “It’s important to understand that, while the franchisor does national advertising and may have a 1300 number, leads aren’t handed out on a plate. Good franchisees are always soliciting business.”


A major benefit of being part of a franchise is support.“When we compared independent and franchised businesses during the economic downturn we found that support made a difference to business survival,” says Frazer. “A good franchisor holds your hand as you learn and provides ongoing support but, unless they pay someone like a mentor, independent business owners have nothing.” Franchisees also have the support of their peers. “Group peer learning in properly facilitated education environments is one of the most powerful tools for franchise growth and profitability,” says Arena


Training sessions and conferences give franchisees an opportunity to get together and technology is making it easier for them to communicate day by day.


“Gloria Jeans is an example of a franchise with a very effective intranet,” says Frazer. “Franchisees can share ideas and help to solve each other’s problems and, while the franchisors keep an eye on it, they only get involved if they need to correct a technicality or provide information.”


The benefits of a franchise come at a price; some people choose an independent business for the simple reason that it can cost less to start up. “Before you invest in a franchise you need to be sure you’re getting value for money,” says Frazer. “This part of thorough due diligence is something you should never rush. The first step is to compare what you could do for yourself with what a franchised system has to offer. If you decide to go ahead with a franchise, look closely at different systems to see exactly what you can expect for your ongoing royalty payments. Our research has shown that the quality of the communication is as important as the frequency, and the best people to talk to about that are current and

past franchisees.”


Start an independent business and you’re effectively taking a gamble that there will be a market for a particular product or service. A franchisee can start out with both proof of concept and an established brand.“Brand is everything in a franchise, and it’s a two way communication,” says Arena. “The company creates a brand through its positioning, customer service, product and service offering and then the customer talks back. The customer measures what the company says about itself against what he or she believes about the company then talks to others about the experience. As most franchises have multiple outlets, the brand

is more apparent in the community, so there is more chance of the company growing exponentially.”


There is also more chance of a franchised brand crashing spectacularly if it fails todeliver its promise to customers – so when is a system considered proven?


“The banks used to like a system to have at least four years of franchising history and 10 franchises, and I think that’s a good guideline,” says Arena. “In my opinion, another sign of a good franchise is one that  runs company stores well. These franchisors are not just saying ‘go out and do it’ they’re saying ‘watch how I do it’.” As well as providing models for best practice, corporate units can be used to trial new products, train new franchisees and staff and act as seed ground for new franchisees. Recent research by the Franchise Relationships Institute also suggests that well-resourced company-owned stores can be just as profitable as franchised outlets. “It’s true that some franchisors have company-owned stores by default, either because they’ve inherited units from failed franchisees or they don’t have appropriate franchisees for a particular site,” says Greg Nathan, founder of the Franchise Relationships Institute. “But, for franchisors with good planning and a strong infrastructure, they can be an integral part of the business strategy.”


There are no definitive statistics to prove that franchised businesses are more successful than independents, though those which are available suggest that this is the case. For example, slightly fewer than half of all new small businesses that opened in 2009/10 were still operating three years later while

the average tenure of a franchised business is seven years. However, when the choice is between a franchise and an independent business, general statistics are less important than the individual’s personality and motivation and the quality of the particular franchise.


In the end, only self-reflection and extensive due diligence will answer the question ‘is a franchise right for me?

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