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Franchise Versus Independent
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Article 2: Investment Costs
Although many independent businesses can be started on a shoestring, most franchise opportunities require a fairly substantial initial investment, usually at least a few thousand dollars and often considerably more.
Also, franchisors (the companies that sell you the right to use their logos, resell their wares and operate their proprietary systems) not only require up-front investments, but also increasingly investigate the financial reliability and character of franchise buyers. Not every franchisor wants every would-be franchisee operating its franchises.
Whereas many startup independent businesses can begin in virtual offices out of the entrepreneur’s home, franchises tend to require the brick-and-mortar approach with a conventional storefront. In many cases, the franchisor helps you find a suitable location. Some franchisors even assist in arranging financing for startup costs, but many don’t.
If it’s your responsibility to find a suitable location and to pay the lease, your costs can be considerable. Generally, you can expect that your startup and ongoing expenses will include rent, utilities, security systems, janitorial services, insurance and other related costs typical of retail outlets.
But franchisors also may require certain additional standards for your storefront, which may include greater space, and more elaborate and expensive appointments than you might have chosen if you were setting up an independent business.
On the other hand, in many cases you will be able to buy nearly everything needed to operate your franchise directly from your franchisor. Because of franchisors’ bulk wholesale buying power, these costs can be substantially less than if you shopped for the same material on your own for the same kind of business, for example fast-food restaurant equipment.
However, there is no guarantee your franchisor’s supply line will be cheaper than negotiated purchases from third party vendors. In fact, for some franchisees this has been a point of contention when they felt franchisors gouged them for material and supplies the franchisee could have negotiated cheaper elsewhere.
When investigating whether you should buy a franchise, itemize all the investment costs and ongoing expenses. Then compare them whenever possible with their going rate in the open marketplace. If your agreement requires you to purchase only from the franchisor, be sure you aren’t being taken advantage of by a franchisor using equipment, product and supply sales as a profit center.
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Franchise Versus Independent
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