Franchise v Independent: Which Is a Better Business to Buy?
Have you had enough of working for some-one else? Making some-one else rich while you struggle on and grind out your day, probably unappreciated and unrewarded? Do you dream of taking the next step and being your own boss, and owning your own company?
One of the most important decisions you'll face is whether to buy a franchise or an independent business. Ive seen firsthand the differences between an independent business and a franchise, and during my own business life, Ive owned both a franchise and an independent business.
This is Sarah’s story and how she made the decision between a franchise and an independent business.
Sarah had been working in a corporate banking job for many years and had finally decided it was time to step out from behind the desk and become an owner herself. Throughout her career, she had seen the good and then bad of both franchises and independent businesses. She knew the decision she faced was critical: Should she buy a franchise or an independent business?
Sarah’s goal was to make an informed decision. She began by jotting down the questions that would guide her research:
Which business model offers more control and profitability?
What are the hidden risks of franchising?
Is an independent business riskier?
Which is the better path to success?
Armed with these questions, Sarah started her research.
Sarah’s first stop was franchising. The attraction was undeniable. Purchasing a well-established franchise meant immediate brand recognition. For example, franchises like McDonald's are known worldwide, their logos and reputations acting as magnets for customers. This brand equity was particularly appealing in competitive markets where customer trust was crucial. Moreover, franchises offered a proven business model and operational system, which significantly reduced the risk of failure. The business processes, marketing strategies, and operational procedures have already been tested and refined. This kind of ready-made blueprint for success was attractive, especially for new business buyers who might lack the experience to manage these systems. Additionally, franchisors often provided extensive training and ongoing support, covering everything from initial training to continuous assistance in marketing, operations, and management.
However, as Sarah delved deeper, she started to uncover the limitations. Franchise agreements required strict adherence to the franchisor's brand standards and guidelines. This restriction meant franchisees had limited room for personalizing their businesses or implementing innovative ideas. For a creative person like Sarah, this could be a significant drawback. She learned about a franchisee who wanted to introduce a new product range in his café specifically to cater to local requests. Despite his market research showing a high demand, the franchisor denied his request, adhering strictly to the standardized product range. This lack of flexibility could stifle innovation and frustrate franchisees eager to adapt to their specific markets.
Sarah realised that as a Franchisee, she was dependent on the franchisor for ongoing support, marketing, and product development. Poor decisions by the franchisor would have negative consequences for her business. Additionally, by being confined to a specific territory, this limited Sarah’s future expansion. She agreed that exclusive territories protected her from competition within the franchise network, but also limited Sarah’s growth potential.
The financial commitments also raised red flags. Franchises required significant initial territory and franchise fees, followed by ongoing royalty payments. While these expenses could be justified by the potential for higher revenues and better buying power, Sarah discovered that the franchise fees, royalty payments, and mandatory contributions to national and regional marketing funds could significantly impact overall profitability and cash flow. Franchisees had to contribute to these funds regardless of whether the campaigns were effective in their specific areas.
After weighing the pros and cons, Sarah decided against purchasing a franchise. Sarah wanted the freedom to implement her own ideas and strategies without being bound by rigid franchise guidelines. She wanted the autonomy to make independent decisions without seeking approval to do something in her own business. This realization marked a significant turning point in her journey.
Next, Sarah turned her attention to independent businesses. She found a promising opportunity with a gourmet food store known for its unique, high-quality products. Owning an independent business would give her complete control over all aspects, of the business. She could quickly adapt to market changes and customer needs without needing approval from anyone. This flexibility was incredibly appealing. Sarah envisioned transforming the business by introducing new product lines and creating a community hub where customers felt a personal connection to the store.
However, the risks associated with independent businesses were significant. Unlike franchises, independent business owners did not receive structured training or ongoing support. Sarah would have to rely entirely on her knowledge, experience, resources and willingness to operate and grow the business. She knew the failure rate for independent businesses was higher, and the thought of running a new business without a safety net was worrying. Sarah felt that the independence that comes from running a business, and not having to pay franchise fees or royalties, meant that she could potentially achieve higher profits and have more flexibility in her business.
Despite these risks, Sarah was determined to move forward with purchasing the store. She conducted a thorough due diligence, scrutinizing the business’s financial health, understanding the customer base, and assessing the competitive landscape. She negotiated a purchase agreement that included a comprehensive handover period, during which the previous owner would provide training and support to ensure a smooth transition. Sarah knew that mitigating risks involved being well-prepared and having a solid plan.
With the purchase finalized, Sarah eagerly began implementing her vision for the business. She introduced new product lines, revamped the store’s layout and launched a marketing campaign to highlight the store’s unique offerings. However, she soon faced several challenges. A new competitor opened nearby, offering a similar range of products. Sarah had to differentiate her business to maintain the customer base. She decided to host community events, such as cooking classes and local showcases, to build a strong, loyal customer community. Through perseverance and strategic thinking, Sarah built strong relationships with customers, emphasizing the store’s commitment to quality and community. The flexibility of owning an independent business allowed her to quickly adapt to market demands.
Sarah’s newly purchased business flourished under her leadership, becoming a destination for food enthusiasts. Sarah knew that the decision to buy an independent business had been the right one for her.
Ultimately, the choice between buying a franchise and an independent business will be based on risk and circumstances and a little bit of buyers preference .
Peter Nola is an Auckland based business broker, author and YouTuber with 20 years’ experience and over $100m of businesses sold, helping New Zealand business owners to buy and sell businesses.
Helping buy a business and sell a businesses without expensive mistakes
