Evaluating franchise options vs starting a similar business "manually"


2

When considering whether to start a small business (eg a deli-type, quick food restaurant), how can comparisons across different franchise options (eg Subway, Penn Station, Jimmy John's, etc) be effectively done?

From a cursory glance, they all seem more-or-less identical.

And very little differs from a mom-and-pop sandwich shop (in this example).

Why would someone want to go the franchise route instead of fully owning and running their own version?

Small Business

asked Oct 23 '13 at 22:10
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Warren
329 points

2 Answers


2

There are incentives for taking advantage of a franchise's economy of scale:

  1. Marketing Costs: Everybody knows what a McDonalds, Subway, or Jersey Mikes has on offer. Ma & Pa's Roadkill cafe seems riskier if you are just in transit from A to B. People like known things, and franchises can advertise what that known thing is.
  2. Pricing Power: A large organization purchasing 1 million pounds of flour has a lot more leverage in negotiating with its suppliers than the guy who only buys 100.
  3. Fear: Everybody has a boss, even if it's just your customer. Having a support network makes life easier for those who've not not had a single person they can think of as a "boss" before. A corporate structure with rules, incentives, and accountability in both directions is comforting to those who, frankly, have more to lose. If nothing else, corporate can advise on how best to position your franchise location for success. There are mentors and others with whom you share considerable amounts of knowledge in common. These are people you can talk to and know what you mean about supply, wages, etc... And the advice you receive will be much more specific than something you get from your local business seminar.

Each of these factors can be weighted in one's own individual tolerance for risk, etc... Indeed, one of the nice things about a franchise is that you should be able to get more and better information about the annual expenses of running the franchise, and better market data around expected traffic. In a mom & pop business plan, you will need to secure your own pricing and traffic data. Then, weigh the intangibles (your risk tolerance) against the difference.

answered Oct 23 '13 at 22:20
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Affable Geek
121 points

2

Buying into a franchise is assumed to 1) mitigate some risks and 2) provide a more turn-key business option (read: a thick operations manual). It does some other things but in my mind those are the big ones. You pay for those things... sometimes a lot. But it can be worth it in the end.

As someone who made the decision to go the 'mom and pop' route, here's my experience 3 years in. I don't regret it, but there are things I didn't really think about in the beginning. I had a hard time getting over the steep up-front franchise costs and the long-term revenue splits.

  • do not underestimate the sheer number of decisions that need to be made in order to open even a simple deli. You will have to decide on everything from location to equipment to the color of the menu board. and that's just startup decisions. operational decisions outnumber startup ones by 100x. It can be overwhelming. A franchise makes a lot (if not all) of the decisions for you. I found it almost overwhelming, but you can get through it if you put your mind to it. I would normally say don't sweat the details, but in this industry (quick serve food), details are huge.
  • Franchises are designed to scale so if you want to open multiple locations, it will be easier as a franchisee. Again, not impossible, but easier. We've managed to open 2 locations but I'm starting to see the limits.
  • Marketing and product innovation: it may not seem like it now, but product innovations, keeping things fresh, and then letting people know about it will be huge (now and down the road). A franchise and the marketing ad co-op you buy into does most of that for you. Marketing is very, very hard. It's a constant and unless you love marketing, you will get burnt out.
  • If you ever decide you want to sell your mom and pop deli... I've heard it's extremely hard. Much easier to sell a franchise.
answered Oct 24 '13 at 07:17
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Ts Haines
181 points

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