Independence vs. security

By Scott Reeves

updated 12:25 p.m. ET July 15, 2004

If you love to kick the boss in the shins and jump the fences to roam free, buying into a franchise isn't for you.

But if you see yourself as a team player and if you're looking for a well-known name, buying into an off-the-shelf operation like a franchise is worth a long look.

The trade-off is simple: Independence vs. security.

Typically, a franchised operation offers lower risk, increased buying power, consistent quality control and help in improving the business.

Think of a franchise as a safety net. But it comes at a stiff price.

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Typically, the franchisor sells the right to use a well-known brand name, such as a McDonald's or a 7-Eleven for an initial fee. The “franchise fee” is in addition to the start-up costs of opening a new outlet. In the future, the franchisee often pays ongoing royalty fees typically calculated as a percentage of sales. In addition, many franchisors also sell supplies or services to the franchisees.

In return, the franchise owner receives support in running the business. Many independent business owners learn by finding a hole and falling into it, but a franchised operation offers new owners training and support.

Buying a franchised operation may make it easier to secure a loan because the company and its performance are well known.

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Some fret that franchised operations are homogenized and dull, but for many consumers the consistency of franchised goods and services is a major selling point. This is true for motels, meals, home repairs — you name it.

Always read the Uniform Franchise Offering Circular, known in the trade as the UFOC, and check earnings at similar outlets. It's no guarantee of future earnings, but it gives prospective buyers real sales figures.

A franchisor is prohibited by law from guaranteeing an annual profit, but a reputable company will provide solid estimates of start-up costs and products.

Chains now dominate just about every retail sector. An independent business planning slow but steady growth may find itself out-muscled by better-known competitors with hefty advertising budgets and the capital to fuel rapid growth.

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