Franchises vs. Independent Business
English 312
November 9, 2009
Lanae Lott, Jared Thomas, J.J. Vail, Matt Palmer
Franchise, p.2
Table of Contents
List of Illustrations-............................................................................................................. 3
Abstract ............................................................................................................................... 4
Introduction ......................................................................................................................... 5
Costs.................................................................................................................................... 7
Table 1: The range of start up costs for a Cold Stone Creamery (Kahala Corp., 2008). ........ 10
Table 2: Start up cost range for a Subway (Doctor's Associates Inc., 2009) ......................... 10
Infrastructure ..................................................................................................................... 11
Operations ..................................................................................................................... 11
Location ........................................................................................................................ 11
Legalities ....................................................................................................................... 13
General Business Consulting ........................................................................................ 15
Finances ........................................................................................................................ 16
Marketing .......................................................................................................................... 16
Table 3- Advertising Costs in First Half of 2005 and 2006 (Advertising Age, 2006). ............ 21
Conclusion- ....................................................................................................................... 22
Recommendations- ........................................................................................................... 22
Bibliography- .................................................................................................................... 23
Franchise, p.3
List of IllustrationsTable 1: The range of start up costs for a Cold Stone Creamery ………………………..10
Table 2: Start up cost range for a Subway……………………………………………….10
Table 3- Advertising Costs in First Half of 2005 and 2006…………………………….. 21
Franchise, p.4
Abstract
The research that we conducted was focused on determining whether a franchise
investment or a small business venture is safer. In our research we looked at the costs of
each investment, the infrastructure of franchises, and the pre-laid foundations of a
franchise. Through our research we have found how a franchise operates and how one
might go about buying a franchise. Throughout the paper we focused on two particular
franchises: Subway and Cold Stone Creamery. In evaluating these two franchises we
have become more aware of what exactly a business owner is buying into when buying a
franchise.
Franchise, p.5
Introduction
In today’s business world there are many types of business opportunities. Two of
these options include opening a small business and owning a franchise. Risky markets
encourage business owners to think twice before opening their own business. Some of the
risks associated with any business are costs, infrastructure issues, and marketing. These
concerns are associated with both franchises and personal small business. Figuring out
what kind of business to start is a very difficult process, and should be reviewed with
careful consideration. Each of the aforementioned issues plays a part in this important
decision. Therefore, in order to make a decision as to the type of business that you should
open, you have to look at the different aspects of each business.
In his 2003 research Headd states, “about three quarters of all businesses survive
two years or more, about half survive four years, and 40% survive six years or more (p.
54).” What does this mean to the average American looking to make it big by starting his
own small business? It means that he has to be careful. There are many reasons why
businesses don’t succeed. Headd (2003) suggests that some reasons for these failures
could include low start up capital and young owners. Likewise he also suggests that
factors of success include having starting capital of greater than $50,000, having a
college degree, and starting the business for personal reasons. Other factors of success
include previous business ownership, multiple owners, and being home-based at start-up
(pp. 54-55). Does this mean that prospective business owners should just quit now? No. It
just means that they need to consider all options before jumping head first into any
business.
Franchise, p.6
Another option that business owners have is a franchise. According to the Small
Business Administration “A franchise is a legal and commercial relationship between the
owner of a trademark, service mark, trade name, or advertising symbol and an individual
or group wishing to use that identification in a business” (p. 2). A franchise is something
that you cannot just begin, or start. It takes a lot of planning ahead of time. There are
many things to consider when planning franchise ownership. Such things include work
environment, managing employees, preferred capital expenditures, length of investment
returns, and your goals as a business owner (Elgin, 2007). Some people believe that
franchises are more likely to succeed than traditional start up businesses, but if you do not
consider these things, and pick a franchise that is the right fit, you have the same
likelihood at failure as any other business.
Is a franchise really better than a regular small business? This research paper
intends to investigate the issues that pertain to the decisions that business owners have to
make between these business types. We hope that those who are trying to decide
between a personal small business and a major franchise will find this information useful
and relevant.
Franchise, p.7
Costs
One of the most important factors to consider when deciding between starting a
small business and buying a franchise is the amount of money involved. As a future
owner of a business or franchise one would want to consider the risks involved in both of
these endeavors.
Subway and Cold Stone Creamery are two fairly priced franchises that may be
worth considering when buying franchises. The first thing one needs to consider when
buying a franchise is how much it is going to cost up front. There are several initial startup costs for every franchise. These startup costs include everything needed to start up the
franchise and use the franchisors name. The startup costs generally have a range from
low to high, in Table 1 we see that Cold Stone Creamery has a startup cost range from
$294,250 and $438,850 and in Table 2 we see that Subway has a range from $114,800 to
$258,300. These initial costs include a fee called the initial franchise fee. According to
Winslow “The Initial Franchise Fee is generally the money paid for use of the rights and
trademarks [of the company]” (Winslow, 2009). These fees are usually are a set price for
each franchise and do not have a rate. For Subway the Initial Franchise Fee is $15,000
while the more upper scale Cold Stone Creamery has a fee of $42,000. Other fees that are
related to the initial cost are: Training fees, Real Estate fees, Equipment costs, Exterior
and interior signage costs, permits and license costs, computer training courses and food
Safety Certification Course costs, as well as additional costs to the owner for the first
three months of operation. These cost ranges for Cold Stone Creamery as seen in Table 1
and for Subway as seen in Table 2 depend upon location, market costs, and other
variables (Doctor's Associates Inc., 2009; Kahala Corp., 2008).
Franchise, p.8
Mark Nygren a former franchise owner and small business owner says that when
owning a franchise you work “for yourself but not by yourself” (Nygren, 2009). This
means that when one owns a franchise in contrast to a small business you have the help
from corporate to get everything all in working order. Planning a budget ahead of time is
a must. This planning by inexperienced small business owners many times leads to poor
planning and loss of money. The advantage of buying a franchise is that there is a set
system that already works that will help the new business owner to make a profit without
grave losses. Subway, Cold Stone Creamery and many other franchises provide a training
program for future franchisees, to instruct them on how a typical store will operate. The
training program is meant to give the franchisee the knowledge necessary to manage,
cash flow, monthly profit goals, payroll, utility payments, and more. Corporate cares
quite a bit about the success of their Franchisee’s and wants them to be successful as
much as they do. In contrast with a small business there are no training programs and
nobody to remind oneself about such things as sales tax, lawn care, and other small things
that need to be done to keep the business going. Kurtz claims that about 82% of small
businesses started go out of business within 10 years of opening (p.155, 2009). One of the
factors that contribute to these businesses failing is the failure on the part of management.
Managing a small business can be very difficult and if the manager does not know how to
plan out their budget very well they could be closing the doors of their business for good
much sooner than later (Kurtz, 2009).
After the initial cost of buying a franchise there are several other fees that apply to
franchise owners. The first and most prominent form of fees after the initial buy-in are
called royalty fees. They are weekly fees that are withdrawn from the franchisees
Franchise, p.9
business account. The royalty fees may vary depending on the franchise; we know that
Subway has an 8% fee and that Cold Stone Creamery has a fee of 6% (JBM, 2008;
Entrepreneur Media, 2009). These costs are ongoing and are required by every franchise.
This is how the franchise company earns its profit.
An additional factor that needs to be considered when buying a franchise is the
cost of advertising. Advertising fees are “the annual fee(s) that are paid by the franchisee
to the franchisor as his share of the corporate advertising expenditures” (HJ Ventures
International, 2004). Advertising is done by the franchisor on a national level and in turn
in some cases requires that the franchisees pay a fee. In some cases however there is no
franchise fee. Cold Stone Creamery charges franchisees a 3% advertising fee. This fee is
broken up into two parts. The first 2% goes to the company headquarters and the other
1% is used for local advertising. The 1% is used to advertise locally. This teamwork is
called Co-op; as an owner you are required to participate in your local Co-op (JBM,
2008). Subway charges a 4.5% advertising fee. These fees unlike a small business are
only paying for a small fraction of the amount of advertising being done. When owning a
small business one is responsible for all advertising and gets no help from any other
source (World Franchising Network, 2005).
As we can see there are many financial benefits of buying a franchise over a small
business. There is already a set way how to do things and a proven system. If a franchisee
follows the set system and works with the franchisor it will ensure the success of his or
her franchise.
Franchise, p.10
Table 1: The range of start up costs for a Cold Stone Creamery (Kahala Corp., 2008).
Cold Stone Creamery
Low
Initial Franchise Fee
High
$42,000
Travel & Living Expenses While Training
Real Estate
Architectural Fees
Leasehold Improvements
Exterior & Interior Signage
Equipment
Initial Inventory
$42,000
$500
$5,000
$6,500
$26,000
$4,000
$10,000
$90,000
$170,000
$9,700
$15,200
$91,300
$111,300
$8,000
$8,000
Employee Uniforms
$500
$800
Grand Opening
$100
$5,000
Insurance Premiums
Permits & Licenses
$500
$2,500
$2,000
$3,000
$250
$1,000
$3,800
$3,800
$100
$250
$35,000
$35,000
$294,250
$438,850
Telephone & Utility Deposits & Hookups
Miscellaneous
Computer Training and Food Safety Certification Course
Additional Funds/Working Capital-3 months
Total
Table 2: Start up cost range for a Subway (Doctor's Associates Inc., 2009)
Subway
Low
Initial Franchise Fee
Travel & Living Expenses While Training
Real Estate
Security System
Leasehold Improvements
Exterior & Interior Signage
Equipment Lease Security Deposit
Initial Inventory
Employee Uniforms
Grand Opening
Insurance Premiums
Permits & Licenses
Telephone & Utility Deposits & Hookups
Miscellaneous
Additional Funds- 3 months
$15,000
$500
$2,000
$2,000
$59,500
$2,000
$4,500
$4,000
$500
$2,500
$800
$1,000
$250
$4,000
$2,000
Total
$114,800
High
$15,000
$5,000
$12,000
$6,000
$134,500
$8,000
$7,500
$5,500
$800
$4,000
$2,500
$3,500
$1,000
$8,000
$250
$258,300
Franchise, p.11
Infrastructure
The general infrastructure of franchising or owning a business is the underlining
foundation or basic framework of the operation. There are many aspects in overseeing the
birth of a new business. Some of the more difficult hurdles one might find in opening a
business are financial/accounting start ups, finding a good location, and adhering to, and
dealing with all the local legal factors of starting your entrepreneurship.
Operations
How can having a franchise system’s support make owning a franchise easier to
operate? There are many aspects of franchise support. A very appealing aspect of
franchising is the technological support the organization offers the franchise owners. One
of the most stressful parts of starting a business is creating an effective, well organized
system. One of the most important things a franchise system can offer its franchisees, is
its "know-how." The franchisor’s intellectual property is therefore a closely-guarded
secret only revealed to its franchisees, and you may be asked to sign a confidentiality
agreement during your discussions with a franchisor. The franchisors established
operating systems can include accounting programs, ordering layouts, financial
organizers, promotional events, pay roll organizers, and even protocol on how to deal
with employees.
Location
Another important advantage that owning a franchise can offer, is finding a location to
start your business. The demographics of the area of the location and the geographical
makeup of the location are critical to the success of a business. The surrounding
communities, road ways, adjacent businesses all play a part in the calculated risk of a
Franchise, p.12
new business. In starting a business or buying a franchise it's crucial to find a good
location to heighten your chances for success. "The statement, ‘He was a dummy, but he
had a great location,’ is true for many businesses. Where the business is in relation to its
traffic can make or break the new franchise” (Henthorn, p.1). Major franchise
organizations have experts that will study the area to help find an ideal location that
meets the franchisors expectations. This gives the franchise a better chance to thrive.
These trained professionals cover many important details pertaining to location that you
would otherwise not take into consideration. The following are examples of the work
they will do for you. They will research extensively the demographic data of what people
currently live in the area that your business is located. The franchisor will graph the
franchisees future growth in a specific area based off of their access to pooled data on
other franchises in that area. There is also a study done on data of franchise cannibalism
with similar franchises in the same area. An example of franchise cannibalism is often
seen when two of the same restaurants are located at the same crossroads. There is always
one business trying to drown out the other. Buying a franchise doesn’t always mean
buying a store or building. Many franchises are sold by areas or districts. Wes Miller is
the owner of a youth athletic program called Amazing Athletes. When he bought the
franchise he bought the whole zip code area, which means that he can sell to anyone that
wants to buy his program in a specific area. When I interviewed him about the whole
experience he expressed similar feelings as most franchisees he said, “I saw the
opportunity with Amazing Athletes here in this zone and I knew that the corporation
would be able to make it possible for us to turn this into a success” (Miller, 2009). He
also told me that the main thing that you pay for when you pay the royalties besides the
Franchise, p.13
name brand is there failures. You pay them for having had gone through the pitfalls and
failures in the beginning and finding a successful way to set up there business.
Legalities
Anyone that has gone through the process of legally starting a company can
testify that paying attention to detail is crucial. It can be one of the most stressful
experiences of a lifetime getting everything in proper order and making sure you are
following the right steps in starting a business. A very valuable knowledge of the legal
part of businesses comes with the experienced systems of a large Franchising
organization. Some of the specific areas that these organizations may be able to help are:
1.The approach in hiring with standardized training that is legally reviewed.
2. Consistency in approach to company set up (state licensing), and
3. Depending on the state and local laws, there could be tax benefits that you
otherwise may not find without help from the franchisor.
Is the royalty the franchisee pays to the franchisor worth the amount of help they receive?
There was a consensus among the franchise owners I talked to. They said that it depends
on the product. If you are offering something in a place where your product is in high
demand, then it is easier to write the royalty check at the end of the month (Johnson,
2009).
An important protection for the person planning to buy a franchise is the FTC's
Franchise Rule, put into effect October 21, 1979. The rule requires franchisors to supply
information a prospective franchisee needs in order to make a rational decision about
whether or not to invest. This disclosure must take place at the first personal contact
where the subject of buying a franchise is discussed and at least 10 business days prior to
Franchise, p.14
signing any contract with the franchisee or accepting any money. This is a cooling-off
period intended to prevent franchisees from jumping in without carefully reviewing and
considering what they're doing.
This means a franchisor, franchise broker, or anyone else representing franchises
for sale has to present a disclosure document-the Franchise Disclosure Document (FDD)containing extensive information about the franchise. Furthermore, you must be provided
with completed contracts covering all material points at least five days prior to the actual
date of execution of the documents. Again, this provides another cooling-off period and
the chance to have an attorney review the contracts prior to execution.
As a franchisee, you have little legal recourse if you're wronged by the franchisor.
Most franchisors make franchisees sign agreements waiving their rights under federal and
state law and in some cases allowing the franchisor to choose where and under what law
any dispute would be litigated. Shamefully, the Federal Trade Commission (FTC)
investigates only a small minority of the franchise-related complaints it receives (FTC,
2008).
Sadly there are many people who regret doing business through the route of a
franchise Cecil Rolle, a franchisee from Tallahassee, FL commented on his experience
with the Cold Stone franchise.
I owned three stores–two did $500,000 in sales and the other did $400,000.
Therefore each of my stores was operating well above the average, yet we
were unable to turn a profit… due to a faulty business model and I think
Kahala-Cold Stone knows that. A large number of Cold Stone’s stores are
unprofitable and failing. Yet they continue to sell to prospective franchisees
Franchise, p.15
on their own website based on statements such as “profit by making people
happy” and “Cold Stone’s franchise opportunities are about as solid as they
come”. That strikes me as fraudulent… I think Kahala-Cold Stone is a
poorly, poorly run company and it’s really starting to show to the public
(R.C, 2008).
It is very difficult to find anything of poor report about the Subway franchise.
General Business Consulting
Calling up an outside consultant to assist you can be a burden on your finances.
Most often for general business consulting a business can be charged anywhere from
70$-100$ an hour. It might be worth it. If you get one through your franchise because a
franchise is required to pay franchise consultants fees to generate interest in their
franchises; ergo, possible franchisees can be limited in their choices if a franchise
consultant does not have many franchisors as clients. Additionally, untrustworthy
franchise consultants, motivated solely by profits, may suggest unwise franchiseefranchisor relationships purely to generate income from franchisors. As of yet, there is
no one international governing body dedicated to ensuring franchise consultants’
reputations nor is there any specific credential that a franchise consultant must obtain to
give him- or herself the moniker. Consequently, franchisees are often reminded that
reputable franchise consultants have prior experience as either franchisees or franchisors,
have numerous satisfied clienteles, and carry no unresolved complaints with the Better
Business Bureau.
Franchise, p.16
Finances
Almost all U.S. franchisors provide financing. Some will often carry the entire
loan through their own finance company. Instead of financing the entire start-up cost,
franchisors may offer financing for portions of the cost. They may have financing plans
for equipment, the franchise fee, operational costs or any combination thereof. Worst
case scenario the franchisor will finance a portion of the start-up cost, the franchisor
made prior arrangements with leasing companies to lease the franchisee the equipment
necessary to run the franchise. Since equipment often makes up between 25 and 75
percent of a franchise's start-up costs, much of the financing need is already waiting.
There are many ways to get equipment and other assets for your business even if
you have to simply lease them. Types of financing companies will often provide assetbased lending to finance franchisees' furniture, equipment, signs and fixtures, and will
allow franchisees to purchase the equipment at the end of the lease.
Franchisors want to make money as bad as you do. So if you have a reasonably
good credit record and pass all the financial requirements, it should be easier passing gym
class to get financing. The help that franchisors provide to help you get financing usually
includes assistance with business plans and introductions to lending sources
(Entreprenuer.com, 2009).
Marketing
Marketing is an essential part of any business plan. Whether that business is an
independent small business or a franchise of any kind, marketing is still an important
aspect of the business success. The first step to understanding the differences between
marketing between a franchise and independent business is to understand the basics of
Franchise, p.17
what marketing is. According an interview with Elizabeth Wilson (2009), writer for
Entreprenuer.com, expert marketing consultant Mark Stevens says:
Marketing is the most misunderstood work in business; ask 100 people what
marketing is, and you'll get 100 different answers. You get back: advertising,
websites, good service, etc. It's all of those things, but the essence of marketing is
that it's the movement of the business from one level of profitable revenue to the
next. Marketing has to be a driver of business growth…The only valid definition of
marketing is the ability to take a company from one level of profitable revenue and
continue to do that. (p.1, 2009)
As it mentions, marketing is a combination of many things. These various methods
include direct marketing, advertising, public relations, positioning, packaging, social
networking, and various other methods and styles (About, 2009; Stripp, 2008). Each of
these different types of marketing has a different purpose, and is applied in a different
way.
Franchises and independent businesses can both be influenced greatly by many
different methods of marketing. However, the marketing in each business type is handled
very differently. The key to the successful marketing of a small independent business is
to stay competitive. The strategy you use will depend greatly on the industry you are in.
However, it is very useful to examine the strategies used by similar companies. Their
strategies could be very successful for you on a scale that works for you and your
business. If a large company is using a television and radio campaign, you can use this
strategy too. You can take advantage of local radio ads, which are considerably cheaper,
or work with the local television station to create a campaign that works with your
Franchise, p.18
budget. Another way that is useful to increase your growth and profit through marketing
is to take advantage of new technological trends or avenues. This is an advantage that
small businesses have on the larger competitors. This is because independent businesses
are not hindered by constraints, committees, and boards (Stripp, 2008). Every business
has challenges, no matter what industry they are in. One of those major challenges is
marketing. In his article marketing consultant Patrick Zuluaga (2008) presents 6 main
challenges that business owners face. They are:
1. Defining Target Markets- Who are you targeting and where do you find them? Keep
them in mind when doing promotional or marketing campaigns.
2. Increasing Repeat Business- You need to give your customer a reason to come back.
Coupons, e-mails, and newsletters are all excellent avenues.
3. Getting Consistent Referrals- Openly ask for referrals. Track customer referrals,
keep them updated, and show gratitude for their efforts as part of a referral program.
4. Increasing Sales Conversions- Provide offers with incentive to take action in a
specified time. Focus on generating a response that converts to sales.
5. Finding Time & Resources for Marketing- You cannot afford to neglect marketing.
Take the time to achieve exceptional marketing methods, with the resources available to
your budget. There are lots of affordable resources available.
6. Developing a Marketing Plan- If you are serious about your business you need a
marketing plan to support your business objectives. Templates are available online. Make
sure your marketing ideas are in line with your business objectives by abiding by this
plan. This will help your marketing efforts to be collaborative and cohesive. (Zuluaga,
2008)
Franchise, p.19
Although these 6 challenges are not inclusive, they are important to understand when
deciding on the type of business to begin. It is important to understand the strengths and
weaknesses in marketing that an independent business has. You will have to rely on
yourself to get you through most of the time.
A franchise has strengths and weaknesses in marketing too. There are many good
things and bad things to consider when deciding whether or not to purchase a franchise
when it comes to marketing. Franchises are based on contractual agreements and they are
usually unilateral. Sometimes this can cause problems, and can be a challenge. Working
with others in charge is more difficult than being your own boss (Eglin 2009). You have
to trust in the franchise. Franchise expert Jeff Elgin says, “You’re in a position where you
have to trust the franchise company to do the right thing by you in the future.
Unfortunately, you’re not going to get all of the protections you might like in the
franchise agreement, and that can make people uneasy” (Elgin, 2009). Franchises come
with a lot of restrictions. They have restrictions on what you can do and what you can’t
do. Every franchise contract visibly outlines things that you must do. One part of most
franchise contracts is a mandatory marketing program. Although they are mandatory and
usually a source of contention between franchisees and franchisors, this program is one of
the greatest strengths that the franchise holds. This program usually includes a required
contribution from the franchisee that can either be a fixed amount or percentage of gross
sales. This fund is under the control of the franchisor, and although the money is
specifically for marketing, the term may be broadly defined. The main reason why this is
such a strong point for most franchises is because the large pool of money that is
available gives them more power to build the brand. It gives the franchise opportunities
Franchise, p.20
to run TV advertisements that no small independent business could ever afford. The
quality of the marketing is often much better than independent business because of the
money available to spend (Elgin, 2002). This money is often spent on fantastic national
marketing campaigns to drive customer to the local stores. For example, in the first half
of 2006 Subway spent $175.5 million on advertising for their stores (see Table 3). No
independent small business could ever afford to spend this; however, Subways all across
the nation were benefited by this spending. Their mandatory marketing program made it
possible.
Whatever you decide to do you, “Take your time and make sure you know
whether or not you’re dealing with a good marketing program” (Elgin, 2009). Marketing
is important, whether you are a small independent business, or a franchise. It is what
makes or breaks your business. Marketing drives the sales.
Franchise, p.21
Table 3- Advertising Costs in First Half of 2005 and 2006 (Advertising Age, 2006).
Franchise, p.22
ConclusionAs you journey through the world of business, choosing your business entity is going to a
difficult decision. However, much of the decision is embedded in your personal values
and goals. If you are a person who enjoys complete independence and a lot of autonomy
an independent business is definitely the way to go. If you are not a big risk taker, then
the clear choice is purchasing a franchise (Subway is a good choice.)
Recommendations1. It is arbitrary, a complete case-by-case situation as to whether franchise or
independent business is better.
2. Prioritize your goals and values before analysis to establish what you want out of
your business.
3. Do a thorough analysis of any business opportunity.
Franchise, p.23
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