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Franchise or Non-Franchise. Which is safer. Which is a better bet?

The arguments rages on. Will a franchise business have a better chance of surviving than a non-franchise business? The franchise industry will tell you “yes” and have good evidence to back their claim. On the non-franchise side, there are simply no reliable statistics on the real failure rate of small business. BCI Business Brokers recently surveyed 50 business brokers and asked them their experience of business failure of business transacted through their offices. The result showed the failure rate to be less than five percent over two years. Accountants that are regularly poll from BCI Seminars find exactly the same. We must look to general business valuation principles to find the answer to this intriguing question.

Pro Franchise

You would expect franchise businesses to have a better chance of survival. The franchisor as well as the franchisee are trying to make it work. Often this successful partnership ensures success.

  • A franchise business has systems and manuals to help the owner to better operate the business.
  • There are other similar businesses within the franchise chain, so the franchisee can refer to these successful people for guidance and benchmarks of success.
  • Franchise businesses can quickly create brand awareness and market acceptance through advertising and wide presence in the marketplace.

Anti Franchise

  • The franchisor will take some percentage of profits, making it harder for the franchisee to make money.
  • The franchisor may make it difficult for you to change direction or strategy if the market takes a turn for the worse. You lose flexibility.
  • After a couple of years, you can do all the things the franchisor taught you, so the franchisee fee over time returns less value. Unless the brand kicks in, you lose.
  • You are not your own boss. You are not free to follow your own intuition if it is outside the system.

Some people will be suited by franchise while others will not. However we can draw some general conclusions.

  • If you are new to business, then a franchise will help you. It should ensure you don’t make the elementary mistakes most beginners make.
  • If you like following systems and direction, then a franchise is for you. If you are a wild spirit, consider non-franchise – or no business at all.
  • If you go into a franchise from startup, make sure you put aside enough money to see you through the early stages towards break-even. While a franchise is a safe option, it could also take a while to get into profit.
  • The better the franchise brand, the more you will have to pay. This applies to resales as well as new franchises. Franchises also sell for a higher multiple on profits than non-franchise businesses. This is due to them appearing safer and hence they are more expensive. This risk factor works the same in property, where the higher the risk, the greater the return on investment is required.

Let’s now look at the personality traits and find out what types of people are suited to franchise and non-franchise businesses.

You are better suited to franchise if you

  • Are good at following direction
  • Have no particular business skill or trade
  • Are looking for steady growth
  • Are conservative by nature
  • Like working in a team environment
  • Are not quite sure of what business you want to buy

Those looking at a non-franchise business should be in general:

  • Highly entrepreneurial and free spirited
  • Skilled in business management
  • Highly energetic and enthusiastic
  • Self disciplined
  • Not afraid of risk

Whether you buy a franchise or other type of business, you will have to have plenty of the following:

  • Capital to survive the early days, without having to cut back on important business expenses.
  • Courage to persist in tough times
  • Ability to learn, grow and adapt
  • Skill in either gaining or retaining clients
  • Preparation. You need to have all your resources in line before you get involved with owning any business.
  • Luck – it always helps.
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