by Cindy Waxer.
Cary Cheung wakes up at 4:30 a.m. every morning to run a business that requires him to pay a fee. He doesn’t own it outright, and it doesn’t even bear his name. And yet he couldn’t be happier.
That’s because Cheung is a franchise owner of Doc Popcorn, a maker of flavored popcorn that uses a variety of organic and all-natural ingredients. In fact, Cheung abandoned his career as an assistant vice-president at WaMu Investments to become Doc Popcorn’s very first franchisee in November 2009. And just a few weeks ago, Cheung and his wife, Judy, opened their second Doc Popcorn location in California.
Pull-Quote-Tall.pngThe Cheungs aren’t alone. According to the International Franchise Association, approximately 4 percent of all businesses in the United States are franchisee-worked. And the consultancy Franchise Marketing Systems says that franchising is a business model that generates more than $1 trillion in U.S. sales annually across more than 70 industries. Franchised businesses ran 767,483 establishments in the United States through 2008, including establishments owned by both franchisees and franchisors.
But while running a franchise business can be both professionally attractive and personally satisfying, not everyone is cut out for the task. Just ask Amy Bennett, owner of The Greene Grape, a Brooklyn, New York-based seller of fine food and wine. The choice was obvious to Bennett: “Part of opening my own business rather than a franchise was for it to be a creative outlet for me. I wanted something I could contribute to meaningfully.” Add that desire for creativity to the many negatives associated with franchising, such as royalty fees, restrictive licenses, meddlesome franchising authorities, and a lack of ownership, and it is easy to see why many are dissuaded from signing up to become a party to a franchise.
For many others, of course, those negatives are more than outweighed by the many benefits of running a business associated with an established brand and backed by the marketing muscle and support of a large corporation. So how do you know if you’re best suited to run a franchise or if you should strike out on your own? Answering these five questions can get you a step closer to the right answer.
1. How much legwork are you willing to do?
“When you invest in a franchise, you’re getting the brand name of the franchisor, the operating system, a proven track record, not to mention ongoing support, education and training,” says Brian Miller, president of The Entrepreneur’s Source, a business ownership consultancy in Connecticut. “If you started out running your own business, however, you really wouldn’t have anybody to rely on.”
That kind of pre-existing structure was precisely why the Cheungs opted to run a franchise. “My parents owned their own restaurant so I saw the struggles they had starting off and all those lessons they had to learn,” he says. “The attraction of a franchise is the system is created for you.”
“There are very few people who are true entrepreneurs and who can really go out and make a business their own,” says Miller. “But there are a lot of people who have that passion and fire in their belly and know that they want to take control of their own destiny but need a little bit of help.”
2. What are you willing to invest financially?
Launching your own business often requires little to no capital, especially if you start small. But many popular franchises demand lots of upfront capital and collateral—sometimes up to millions of dollars—from a prospective franchisee before offering a contract. These “working capital reserves,” as they’re called, are often required by franchisors so that they will feel comfortable that a franchisee can stay in business until he or she reaches the financial break-even point.
In the case of Cheung, he invested between $100,000 and $150,000 to open his first store, including upfront franchise fees. “That was a main reason why we chose Doc Popcorn—the low entry point.” Every other franchise he looked at was going to cost from $200,000 to $250,000 to start, he says.
Still, some franchises are willing to lend a helping financial hand. “My wife and I funded the store on our own, but I know that Doc Popcorn has third-party connections to help with funding,” says Cheung.
To learn more, check out our previous article on franchise startup costs.
3. Can you back someone else’s product?
While there’s definitely something to be said for creating your own business, many entrepreneurs are proud to peddle a franchise’s products. “The only reason we signed with Doc Popcorn is because of the product and what it represents,” says Cheung. “Of course, trying to make money is always a goal for all business owners but you have to believe in the product.”
For Bennett, however, launching The Greene Grape was an opportunity to express herself and act on her vision of a perfect wine shop. “At the time I opened my first wine store, there wasn’t really a franchise that focused on handcrafted, affordable wine,” she says. “My twist on a regular wine store was part of the creative process.”
4. How much say would you like in the business?
“The advantages to running your own business are mostly in creative control,” says Bennett. “I can market the way I want, my store can have a personality that reflects who we are. This means a lot more work, of course, but at the end of the day I can step back and be proud of how the store is presented.”
That’s not to suggest that franchisees don’t have any input. Rather, Miller explains, “As you become successful in a franchise system, there are opportunities for you to work collaboratively and to develop new products and services.”
5. How long can you wait to break even?
According to Miller, “the support given by a franchise in the beginning in terms of brand recognition means that you might have a quicker start in terms of sales. Educating the consumer for a new business definitely takes more time. Depending on how a franchise agreement is structured, that could mean breaking even for the franchisee earlier.”
Still, if the substantial franchise buy-in requirements are too steep, taking the franchise route (and its more desirable, early break-even point) may not be a realistic option for many budding entrepreneurs. Instead, they may have no other option but to launch on their own, either diving into entrepreneurship full-time and striving for a quick rise in profits or running a side or part-time venture for a longer period of time, until the business proves it can stand on its own.