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BUYING A SMALL BUSINESS

Independent Business or Franchise? How to Decide

It's a question every business buyer faces. Here are five major differences between buying an independent business versus a franchise.

Subway's Fred DeLuca at the counter. He built the first one by himself.

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Buying a small business is a major career step. One of the first decisions you'll need to make relates to the type of business you hope to acquire. Specifically, you will need to decide whether to buy an independent business or a franchise.

At BizBuySell.com, we know buyers can and do succeed with both independent businesses and with franchises. However, there are key differences that need to be considered when determining which type of business is the best fit for your personal and business goals.

Should you buy an independent small business or a franchise?

Some buyers thrive as independent business owners, while others are more likely to prosper as franchise owners. In reality, there are no easy answers to the independent business versus franchise dilemma. Instead, you will need to carefully evaluate the factors that differentiate the two approaches, talk with your family and other trusted advisers, and decide which one is right for you.

1. Ownership Model

From an ownership perspective, a franchise is very different than a typical small business. Unlike independent business owners, franchise owners don't have the freedom to change their products or services based on their personal desires or changing market conditions. To a large degree, the franchisor (i.e., the parent company) makes the decisions about product lines and other variables.

But on the other hand, independent business owners don't have the security of knowing that product lines, service offerings and other ownership decisions have already been tested and optimized for the marketplace. In other words, although franchise owners sacrifice independence in decision-making, they enjoy the security and stability that comes from belonging to a much larger organization with a proven track record.

2. Cost

Independent business owners are likely to have higher investment costs to buy and operate their business, but they also have more control over the investment decisions and timing thereof. For example, if cash is tight, independent business owners can delay remodeling or expansion plans. They can also choose to downsize the scope of the projects they pursue.

Franchise business buyers typically have lower total investment costs (especially upfront), but need to fulfill the obligations set by franchisors. For example, in addition to an upfront franchise fee, franchise buyers are required to pay royalties on an ongoing basis. When it comes to renovations and other investments, the franchisor often has the right to dictate the timing and scope of the remodel to franchisees.

3. Brand Recognition

In most cases, franchise buyers have an advantage over independent business owners when it comes to brand recognition. Unless the independent business seller has proactively cultivated the brand, it's unlikely that the business will enjoy the brand recognition that comes with standard franchise business opportunities.

But buyers also need to recognize that brand recognition can have a dark side. If the franchisor or another franchisee does something that results in negative publicity, all of the brand's franchisees suffer--a risk that independent business buyers don't have to worry about.

4. Operational Resources

Franchise businesses tend to be popular with buyers who lack extensive business or industry experience. Certainly, experienced business owners also buy franchises, but franchisors make it easier for first-time business owners to succeed by providing access to a business system, corporate support, a supplier network and other services.

Independent business owners, on the other hand, typically have to go it alone. In return, however, they get complete control. Although independent business owners retain total control over their companies, they don't have access to the support franchisors provide their franchisees in marketing, operations, supply chain management, human resources and other departments.

5. Success Rate

Variances in the success rates of franchises and independent small businesses are debatable. There is no conclusive evidence that either approach improves or reduces your likelihood of success.

As a business buyer, you need to evaluate each potential acquisition on its own merits. Both franchises and independent businesses fail every day, and, at the same time, people clearly have success with both models. The key takeaway is that, whether you buy a franchise or an independent business, it's important to do your homework and thoroughly research the business before you invest.

Ultimately, the decision to buy a franchise or an independent small business may boil down to your personality as a business owner. If you can't see yourself relinquishing control over operational decision-making and other activities, then a franchise likely isn't the right business model for you. However, if you prefer the security, stability, and benefits of participating in a larger organization, then the acquisition of an existing franchise or opening a new franchise location may make more sense than the purchase of an independent small business.

IMAGE: Jeffery Salter/Corbis
Last updated: Jun 5, 2013

CURTIS KROEKER is group general manager for BizBuySell.com and BizQuest.com, the Internet's largest and most heavily trafficked business-for-sale marketplaces. BizBuySell.com has more than 910,000 monthly visits.
@BizBuySell




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