Franchises vs. independent businesses
When the two roads of franchising and independent business diverge, which path should an entrepreneur travel?
Typically, individuals pick one or the other and do not start franchising in order to acquire funds to start their own independent business, said Brigitte Betser, a franchise placement specialist. Betser works for FranNet, a consulting company that provides education and support to individuals interested in exploring franchised business ownership.
FranNet is hosting the West Michigan Franchise Forum, “Meet the Franchisors,” from 1-3 p.m., Thursday, Oct. 18, at Northwood University’s Grand Rapids campus.
“What we do at FranNet is we build a business model unique to the individual client we work with, and then match them up to the franchise that works best with them,” Betser said. “I guess we’re kind of like a dating website for people who want to find the right franchise.”
Franchising can offer a cost-effective entrance into a proven systematic process, Betser said, adding that a down economy isn’t necessarily a bad time to start a business. Businesses can reduce risk by focusing on specific market characteristics.
“Franchising is a great option for individuals (who are) a little more risk adverse,” she said. “It’s a perfect hybrid between being corporate America and being an entrepreneur. You’re in business for yourself, but not by yourself.”
That support was the main comfort attracting Russ and Donna Ramsay, who went through FranNet to start their Signworld U.S. Inc. franchise business. Donna Ramsay said Signworld, a direct sign and display product manufacturer, has about 250 owners around the U.S. and Canada, and allows its affiliates more liberties than many franchises, even letting them pick their own name.
The couple titled their business Grand River Sign, which they started in June. They will move into their space on East Paris Avenue SE this month.
“We liked the idea of being part of a network of other owners and knowing that a model is going to be successful versus having to do the legwork until you get to the point where you will be successful,” she said. “Once you establish your business, one of the different factors of this concept is you get to name it what you want, and there’s no franchise fees or royalty fees. You’re free to grow your business and find your niche market, unlike another franchise where you’re told what to sell.”
The startup has not, however, been without costs. Donna Ramsay said they had a buy-in of $145,000 and were expected to have anywhere from $20,000 to $40,000 in working capital.
Buy-in costs were what kept Malikah Pimpleton from franchising when she started her business. Pimpleton had wanted to own a Papa Murphy’s Pizza, but did not have the money to start a franchise. Instead, she worked with LINC Community Revitalization to start her own pizza business, Urban Pizza, in June 2010.
The Papa Murphy’s Pizza on 28th Street SE, which Pimpleton used to visit, closed the same year she started her business.
“With franchising, you’re paying for the name and brand recognition — you get that cookie-cutter effect,” she said. “With me, you get new and different products. We can change things as we want — be it menu, recipes, aesthetics — and add different aspects to the business.”
Pimpleton said starting a new business requires a lot of research, due diligence and a fluid budget. Many small businesses spend unnecessarily on frivolous marketing techniques, she said, a mistake she believes she made early on.
“In the last couple years, I’ve met 20 to 30 different small business owners, and only four of us are still in business,” she said. “It’s very difficult to open your own business. People don’t know about you, your product, or your location. Basically, we rely a lot on word of mouth.”
Although small businesses allow for more independence, franchising might draw in the larger numbers. According to the International Franchising Association, research shows that “over 900,000 franchised businesses provide 21 million jobs and contribute $2.3 trillion to the U.S. private sector economy.”
“Franchised businesses are the cause of nearly 21 million jobs, or 15.3 percent of all U.S. private-sector jobs,” the FranNet website reads. “Franchised businesses are the cause of $660.9 billion of annual payrolls, or 12.5 percent of all private-sector payrolls in the United States. Franchised businesses are the cause of $2.31 trillion of annual output, or 11.4 percent of all private-sector output in the United States.”
Betser said the average small business makes $1.3 million in annual revenue, and in most states, small businesses account for 30 percent of economic activity. Small businesses with less than 100 employees represent 99 percent of all employers.
“Small business has a huge impact, and they don’t realize how important it is in the U.S.,” Betser said. “But if you look at the facts and figures, it really does.”