The Choice Is Yours Should you buy a franchise, a business opportunity, or go it alone? Don't leave this important decision to chance.
Opinions expressed by Entrepreneur contributors are their own.
Do you want to be an entrepreneur. Just how do you get started?This is the question facing almost anyone looking to get into theirown business, and there are basically three answers: Buy afranchise, invest in a business opportunity, or start anindependent business from scratch.
Franchises appeal to those who need more structure and supportwhen they get started, and who are looking for an establishedbusiness name and mode of operation. Business opportunities aremore for those looking to ease into a business--something that canbe started as a sideline and that comes with a set of instructionson how to begin. Independent start-ups appeal to moreself-sufficient and aggressive people--folks who know they like todo things their own way, right from square one. Each option offersdifferent advantages, but the key to making the right choice is to"know yourself first."
As the president of the Venture Association of New Jersey, abusiness-networking group, and a senior partner with theMorristown, New Jersey-based Trien, Rosenberg accounting firm, JayTrien has been both an entrepreneur and an advisor to many smallbusinesses. Trien says that those more independent in nature arebest served by independent start-ups, which are essentially riskierbut give a bigger potential payoff, while those more cautious andbound by rules are more likely to succeed if they play it a littlesafer by investing in a franchise.
"The classic example is the two guys who started apersonal-computer business; did they know they would build AppleComputers?" Trien says. "The opportunities are unlimitedwith an independent start-up, but you've got a lot more atrisk, too, because you've got to learn everything on yourown."
Interestingly, Trien says that potential investors are oftenattracted to independent start-ups because of the nature ofentrepreneurs who start a business from scratch. He says thatpeople starting their own business are often attempting to provethemselves right about an idea, and the enterprise becomes anoutgrowth of that personal process.
"Their business is an extension of their personality ortheir emotional needs rather than just a way to make a lot ofmoney," Trien says. "Most venture capitalists I know likethose types of entrepreneurs better than the guys who just want toget rich quick. If the energy of someone who wants to prove theiridea is right can be harnessed to basic business disciplines, thatenterprise can be very attractive to investors."
Glen Weisman explored the fine points of dealing withsuppliers in the December issue of BusinessStart-Ups.
What It All Means
Legally, in order to be considered a franchise, a franchisormust charge franchisees a fee for the right to offer certainproducts or services using the franchisor's name, trademark andservice mark, and require the franchisee to operate and market thebusiness according to the processes and standards set by thefranchisor. The franchisee also receives access to ongoingcorporate support.
A business opportunity offers the buyer, or licensee, a chanceto begin a business selling or leasing the goods or services of thelicensor, usually with the guidance of a proven operating system ormarketing program. The parent company sometimes offers start-upassistance or ongoing support.
Starting a business from scratch entails presenting your idea,product or service directly to the buying public. Your business mayhave a retail storefront, be based in your home, or be operated onan on-site-service or door-to-door basis. You must secure your ownfinancing, develop your own sales and marketing strategies, andcreate a business plan.
Trien looks at franchising as the other side of the coin. Hedescribes franchising as a two-way opportunity: Franchisors get theopportunity to grow without the massive capital expenditurerequired to form a chain, while franchisees get a proven way ofdoing business.
"A franchise is relatively safe, but not everyfranchise is safe," Trien cautions. "In many cases,franchisees simply bought themselves a job. The guy who is asuccessful corporate soldier, who was willing to become subject toa `totalitarian regime' because it promised him protection,wants to be part of a strong franchise organization wherethey're going to tell him how to march.
"People do get a lot of information and a lot of help fromlegitimate franchises," Trien continues. "The danger isthat there are franchisors out there that don't have thecapacity to fulfill their own plan, and there are a bunch that arethemselves undercapitalized. You could be part of a franchise thatdies; that is part of the entrepreneurial risk. It's not arisk-free decision."
John Reynolds, executive vice president of the InternationalFranchise Association, a nonprofit organization in Washington, DC,disagrees, saying that franchises are much more likely to succeedthan independent start-ups because of the evaluation process anentrepreneur must go through before buying into a franchiseopportunity, and because of the business structure and supportfranchises provide to new franchisees.
"The reason that most franchised businesses tend to have alower failure rate is that most franchise companies do a better jobof financially qualifying the franchisee before they start thebusiness," Reynolds says. "The reason that mostindependent businesses fail is due to inadequatecapitalization--which means that people don't have enough moneyto live on while they're getting their businesses off theground."
Reynolds questions statistics recently published by the SmallBusiness Administration (SBA) which state that franchises have asuccess rate of roughly 62 percent over a four-year period, whileindependent start-ups succeed at a rate of 68 percent. He citesstudies that place franchise success at a rate of 90 percent orhigher annually, and at around 85 percent during a franchise'sfirst five years.
"The SBA study tended to be out of line with a lot of otherstudies by the Department of Commerce or the Big Six AccountingFirms," Reynolds says. "The failure rate of franchises inthose studies was a very low percentage, in the five-to-10 percentrange annually. It's really hard to get data about franchisedbusinesses that compares them to independent small businesses soyou can make an apples-to-apples comparison."
Reynolds explains that franchises are also substantiallydifferent from business opportunities, in both the dynamics ofoperation and the support received from the parent company afterinvestment.
"The shorthand, oversimplified difference, in most cases,is that with a business opportunity, all you get is a stack ofbusiness cards and the opportunity to go into business by yourselfselling whatever it is the business opportunity is selling,"Reynolds says. "With a franchise, you get a business systemand the opportunity to go into business, not only for yourself butwith the franchise system behind you. So you're going intobusiness 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 intothe $500,000-to-$700,000 neighborhood, with the average start-upcosting between $150,000 and $200,000. Reynolds says that with morethan 65 types of business being franchised, the cost of investmentis largely dependent upon the specific type of business.
Franchises that provide more overhead services, such asaccounting, payroll and marketing services, or those with moreintensive equipment requirements, are generally more expensive,according to Reynolds. He points to personnel services as anexample of why franchises tend to have higher fees androyalties--because of the level of overhead services typicallyprovided by the franchisor.
"You can select a franchise concept that is a maturesystem--one that's been in the business a long time, has a lotof franchises, a big market share, and some staying power in themarketplace--and you're going to have a more secureinvestment," says Reynolds. "Or you can choose a businessthat's a relatively new concept--one where they've been inbusiness less than five years and have a smaller number offranchises. Your investment may not be as secure, but whoknows--that may be tomorrow's big franchise success. Soyou've got that ground-floor opportunity. It depends on aperson's financial goals."
DeeAnne Clowes became a franchise success story after relocatingfrom Boise, Idaho to Atlanta. While contemplating a new career, sheheard about Budget Blinds, a franchise operation that's been inthe window-covering business for a little more than a decade. Shelooked at a few business opportunities, but a friend's successwith a Budget Blinds franchise inspired her to buy one, too.
"I have a business and accounting background, and I wasattracted 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 withcompany support instead of you being out there on your own tryingto figure it out," says Clowes. Those factors and a start-upcost of around $12,000 made the endeavor attractive to Clowes, soshe took the plunge.
Since the financial rewards are now going straight to her ratherthan to a boss or company shareholders, Clowes finds the hard worksatisfying. Clowes' business has produced cash from the start,and has steadily grown to the point where she is realizing monthlysales of between $35,000 and $45,000 after just a year and ahalf.
"The experience has been wonderful. I thrive on it,"Clowes says. "I don't think there are any drawbacks to afranchise. I know franchise owners who complain about payingroyalties every month, but I don't mind. There is no way Icould have done it without Budget Blinds' support. I used theiroffice, their support and other franchisees (for informationrelating to the business) constantly when I started out."
The Franchise Pros:
- Statistically, there is a low failure rate in the first fiveyears 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 thepurchase.
- Proven operational systems remove the guesswork from starting abusiness.
- A substantial initial investment is required, generally morethan $10,000.
- Ongoing fees or royalties must be paid to the parentcompany.
- Rigid operating guidelines, as set by the franchisor, must befollowed.
- International Franchise Association
1350 New York Ave. N.W., #900
Washington, DC 20005
- Individual franchise sellers
(Federal disclosure regulations force franchises to make awealth of information available to potential investors.)
According to Andrew A. Caffey, a franchise andbusiness-opportunity specialist who practices law in Bethesda,Maryland, the lack of a continued relationship between the sellerand the buyer of a business opportunity, and the supplying of abusiness "blueprint" for the buyer to follow with norigidly enforced operating structure, are the most basiccharacteristics that distinguish business opportunities from othertypes of businesses. He says business opportunities are generallykits describing how to get started in a certain business, sometimesproviding a buyer with a product-distribution network. The pricefor a business opportunity is typically in the $500-to-$5,000range, he adds, though they can be priced much lower or higher.
"The major reason to opt for a business opportunity over afranchise is independence," Caffey says. "Abusiness-opportunity buyer can operate independently and is notgoing to be required to operate under the restrictions that afranchisor is likely to impose."
Caffey says that, while business opportunities are not asdiligently regulated as franchises, regulations exist at thefederal level and in 25 states that apply to businessopportunities. However, many of these regulations don't applyunless the purchase price is at least $500.
The value of business opportunities can be found in their twobasic components, according to Caffey: the distribution networks,which give business-opportunity buyers access to products orservices being sold by business-opportunity sellers, such asspecialty items or information services; and the instructionalcomponents on how to get started with the business opportunity.
Business opportunities can be found in magazine advertisementsor at business-opportunity trade shows, but there are no agenciesor associations to make researching business opportunities easier,Caffey says. The lack of a national organization amongbusiness-opportunity sellers and their lack of ongoing contact withbuyers are the chief reasons Caffey cites for the difficulty ofjudging their success rates.
"A good business opportunity is packaged and thought outfor you in advance, and doesn't require a large investment orcontinuing royalty payments," Caffey says. "The downsideis 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 issomething you want to do, and something that will fit with yourpersonal style and budget."
Finn Skeisvoll found a business opportunity that fit himperfectly. A Norwegian immigrant who was working as an electricalengineer, Skeisvoll decided to invest in a business opportunity,distributing products provided by Specialty Merchandising Corp.(SMC), a high-volume gift importer and business-opportunity sellerlocated in the Los Angeles suburb of Chatsworth, as a sideline tohis regular job. Eventually, the business opportunity grew into hisprimary livelihood and provided him with a lifestyle that he sayshe couldn't have enjoyed on an engineer's salary.
"I always wanted to get into something of my own. It was mydream," says Skeisvoll. "I saw a few ads and investigateda few companies, but I decided that I liked SMC. They had alocation close to my job, and they had a showroom where I couldcheck out the products."
The attractive cost of becoming a distributor, which Skeisvollremembers being around $100 when he started his business 25 yearsago, was one of the factors that attracted him to the businessopportunity. Skeisvoll acknowledges that his own independent naturewas another factor that made the business-opportunity relationshipattractive to him. From this relationship, Skeisvoll startedScan-Am Enterprises, a company that provides novelty items toseveral large mail order clearing houses, including such giants asCarol Wright and Fingerhut. "At first, I didn't have tocome up with much start-up money," he says. "I was stillworking my regular job, and this was something I could easily do onthe side."
Skeisvoll had no real business experience, outside of a fewbusiness classes he had taken in Norway, so the learning was doneon his own. The local library became Skeisvoll's basic researchtool; 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 goalong," Skeisvoll says. "I've been very, veryfortunate. I have only good things to say about it. It'sabsolutely better than my career as an electricalengineer."
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 bepaid.
- Your business will be selling a product and using a system ofoperation that have already been proven.
- The product or service may not have a brand name which yourpotential customers will recognize.
- Often, there is no system of support following thepurchase.
- Currently, there is a lack of information on the success ratesof business opportunities, making them harder to research.
- Dun & Bradstreet (for reports on individual businessopportunities)
1 Diamond Hill Rd.
Murray Hill, NJ 07974
- Better Business Bureau
- Federal Trade Commission
San Francisco-based business consultant Paul Terry says that thepeople he helps to start their own businesses are intent on doingthings their own way, and believe it is less expensive to startfrom scratch than to buy a franchise. They also head into an areaof business they have experience in or strong feelings about, andlook at their business as a personal challenge.
Terry describes new entrepreneurs as people who "tend tohave a passion because they're doing something they reallylike, and they tend to have a background in that particular areabecause it's a hobby, or it's an idea they'veoriginated. So they tend to start their own business. People whochoose a franchise feel that they are buying an existing turnkeyprocess which has less risk, so this is an attraction tothem."
Two years ago, Denise Martineau started tricom systems, anOakland, California-based computer-consulting andtechnology-planning company, in order to pursue a type of businessthat captured her interest. A scientist by training, with anundergraduate degree in chemistry and graduate work completed inchemical physics, Martineau began her business with no formalbusiness background.
"It's much better than any job I've ever had, interms of fun and in terms of money," says Martineau, whostarted her business without really looking at options likefranchising or business opportunities, and basically learned aboutbusiness on her own, through trial and error.
"The biggest asset for me is having control--over myenvironment and over my work," Martineau says. "I'vefound being in business for myself to be very rewarding. You haveto be self-disciplined, and you can't be afraid of--or in needof--authority figures. It's the work itself that makes youwork--you don't need some kind of outside force that makes youwork.
"There's a certain amount of self-understanding thatyou have to have; you have to understand what motivates you, andyou have to understand what it is about being a start-up thatengages you," Martineau explains. "Some people areengaged by the idea of making a lot of money. I'm engaged bythe idea of creating an environment where I can pursue my owninterests."
During the start-up phase, Martineau turned to San FranciscoRenaissance, a business incubator and educational center forentrepreneurs. She found their training extremely helpful inproviding her with a framework for launching her enterprise. Shealso suggests MBA programs with entrepreneurship training classes,independent business associations or groups, books, periodicals,and accommodating professionals as good resources for peopleseeking to start their own business.
"I'm having a good time, I'm making more money thanI've ever made before, and I've reached a new level ofprosperity," Martineau says. "I really like the idea thatI am creating jobs for people, and not just minimum-wage jobs. Ifeel like I'm pumping a lot of money into the economy, and thatreally adds to my enjoyment."
In the end, getting into business --in any format--requires alot of honest self-reflection and self-assessment. Making thedecision between a franchise, a business opportunity or anindependent start-up remains a matter of personal choice andcomfort. Weigh the pros and cons of each choice before making yourfinal decision.
The Independent Start-Up Pros:
*There are no strict company guidelines that must be followed. Youhave the freedom to make your own rules.
- There is a greater opportunity to build equity.
- There are no predetermined start-up charges, continuing fees orroyalties to be paid.
- Independent start-ups statistically have a lower rate ofsuccess than franchises or business opportunities.
- There is no main office or corporate headquarters to call foradvice 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, CA94107.
Venture Association of New Jersey, P.O. Box 1982,Morristown, NJ 07962-1982, (201) 267-4200, ext. 123.