Ray Kroc met with a couple of enterprising brothers in 1954 and made history with the franchise known as McDonald’s. At the time the business began, there were few franchises to buy into and certainly no hamburger restaurants that were so accessible and affordable. Over fifty years later, there are an infinite number of franchises, but very few have had the success of McDonald’s. In addition, many franchises are going bust in the current recession, while similar franchises are still turning a profit.
When an individual decides to go into business, he or she has an important decision to make – whether to start a business from scratch or to buy into an already-successful franchise.
One might assume that buying into a successful franchise such as McDonald’s, Starbucks or Subway is a no-fail proposition. After all, everyone knows these places, so it is easy to assume that an individual who owns one of these businesses will succeed.
Unfortunately, it is not quite that easy. First of all, the prospective businessperson will need to have the initial investment to purchase the franchise. The last estimate for purchasing a McDonald’s franchise was half a million dollars – and this figure only includes the initial buy-in, not the supply or leasing costs (Anthony). If it is not an inexpensive investment, it can include being required to use particular suppliers or approved locations. The next step is to lease property that has been approved by the company – after all, a McDonald’s must have the golden arches while a Starbucks can be opened in a strip mall, an individual building, or even a grocery store.
In addition to these costs, the franchisee will be required to purchase equipment and supplies from a specified source. The company needs to maintain its reputation as every new franchise is a reflection on the original company.
With those costs in mind, an entrepreneur must reduce risk by making a smart investment that is the result of careful research. The first step in that research is to make an initial offering and show of interest. Once approval has been given, it is time to request disclosures from the franchisors, which will reveal information on “on 23 items, from numbers of lawsuits and bankruptcies to fees and other estimated costs.” (Tozzi). Another important resource is ex-franchisees, those individuals who owned the same franchise at some point and decided to sell. Just as one might talk to former employees of a company before accepting a job, ex-franchisees have inside information which can be crucial in making a sound business decision. In some cases, the ex-franchisee might have a simple reason for leaving the franchise, such as retirement, but one should be careful to document any complaints the ex-franchisee might have had. There are many different levels of franchises, from the most expensive (such as McDonalds) to the more affordable (like Subway). It is important, however, to invest in an established brand and to avoid franchises that are simply trendy. Boston Market, Krispy Kreme and Quiznos were once a good investment, but once their respective popularities wore off, the companies went bankrupt – leaving the franchises without a means to continue (Tozzi). Finally, the entrepreneur should avoid being pulled into a scam – just because a business is a franchise does not mean it is reputable. For that reason, one should get every aspect of a deal to be made in writing. According to franchise expert Les Stewart,
It’s difficult to estimate how many franchises are bad bets because there is no comprehensive tracking of franchise failures…These fly-by-night systems come in to the market because people allow them. They buy them and they think it’s just like McDonald’s (Tozzi).
Finally, one must remember that getting into a franchise is much easier than getting out of it. Many franchisors have strict rules on re-selling franchises, so once in; it can be difficult to get out (Anthony).
Those individuals who have a concept of a product or service will want to avoid the franchise route and start up their own businesses. While this can be difficult, there are many success stories. The first step in starting a business is, as always, conducting market research. The entrepreneur needs to find out if there is a market for their product or service, and how well similar endeavors have fared. This research needs to address the kind of person who will use this product or service and the best way to convince that potential customer to switch.
In Karen E. Spaeder’s article, “How to Research Your Business Idea,” she suggests conducting thorough research on the company, potential customers, competitors and possible collaborators. Collaborators who have an interest in the business might be willing to invest money or assist with marketing. Another important approach is one of the most basic – the SWOT analysis. This analysis covers strengths, weaknesses, opportunities and threats, all of the factors that can help or hurt a business.
It is crucial to check out the competition in order to determine if they have a better product or service and what keeps their customers satisfied. If their customers are not satisfied, this will present an opportunity for the new business. The next step is to find the best name for the business. The name should represent exactly what the owner wants to articulate about the business.
Alan Siegel, chairman and CEO of Siegel & Gale, an international communications firm, believes name developers should give priority to real words or combinations of words over fabricated words. He explains that people prefer words they can relate to and understand. That’s why professional namers universally condemn strings of numbers or initials as a bad choice. On the other hand, it is possible for a name to be too meaningful (Lesonsky).
One must remember that original ideas are difficult to come by. That is why an aspiring businessperson should think of four or five names before checking to see if any of those names have been trademarked. Once a name has been trademarked, no one else can use it. Toys R Us had an original name concept with the single, backward “R”, and other businesses tried to copy it. Those businesses had to change their names because of trademark infringement. A small business whose owner intends to stay small does not need to trademark. Should the business become successful enough to franchise, however, the name must be registered.
One of the most important aspects of starting a business is to understand how to manage money. Businesses fail all too often because the owner does not understand the basics of money management (Gallo). The first step, once the name has been registered, is to set up a business bank account, deposit money, and to establish credit for that business. At this point, the owner can hire a bookkeeper or accountant or take on that additional task. While doing it alone might be a good idea to start, eventually it would be fortuitous to hire an accountant. Soon, the money will start coming in, and the owner must have multiple means of accepting payment. Companies that accept cash, checks, debit and credit cards are more likely to receive more business. However, one must invest in a debit card terminal as well as setting up a merchant account to accept credit cards. Some credit cards, such as American Express, are more expensive to accept, so one must keep that in mind when estimating start-up costs. Finally, there will be times when checks bounce and credit cards aren’t paid, so the smart business owner will have contingency plans (Spaeder).
The one thing that start-up and franchise owners have in common is that they need to prepare for the financial impact of not having an income for a while. Starting a business is exciting, but it is also risky. When one works for a company, they earn a salary, benefits, retirement and other perks. Working for oneself eliminates all of this financial security, so one must be prepared. In either case, there will be employees who will expect a paycheck. An account should be established with a payroll service, such as ADP. There are laws that govern how large a business must be in order to require employers to provide health insurance and other benefits, so the business owner needs to be aware of this and other employment laws.
In conclusion, starting a business is both an exciting and risky prospect. The key to a start-up or franchise is to conduct plenty of research, both on the business itself and on the financial market in general. Back when McDonald’s was getting started, there were few franchises and therefore fewer competitors. Today, there are very few original ideas, so a business idea must be better than everyone else’s or have a unique aspect that is not available anywhere else.
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