Can't decide between starting a business and opening a franchise? Paul Quintero, CEO of Accion East, details the ins and outs of franchises.
Well, if we talk about risk and there are many types of risk and I’ll talk about that in a second, in general the idea behind a franchise is to actually minimize your risk. So I would say, in general, moving toward a franchise type of business is less risky than doing it on your own. Because what are the kind of risks that you typically face? A) the risk of knowing that you have a market for your goods. Well, they’ve already proven the concept so you don’t have to take the risk that maybe they won’t sell. B) the risk of running the business. Policies and procedures. You know, if you start from scratch you have to develop them. A franchise should have already worked through all those policies and procedures. Three, if it’s a physical location – location, location, location – many franchisers help you in location support in terms of negotiating leases, in terms of how to spot the right places, the demographics. So, you bring that expertise to the table versus you found a place that you want to start a business for, other than the real estate and site location, then it’s about how to finance the franchise. And here, I think you have a challenge that’s probably universal. Of the four risks financing is the one that’s common and what we have seen is that franchisers usually benefit a lot from SBA type of loans because there’s a track record, there’s a history, and there’s actually perhaps the franchise agreement that, that a lender can use to then provide to someone else if you fail. So with all these benefits for franchises why would anyone not do it? And the, and the bottom line is it’s expensive. Um, you pay for that certainty. And so if you can start a business on your own for $5,000 to $10,000 versus have to invest a quarter of a million dollars for a franchise, that could be a pretty good tradeoff depending on what you’re looking to do. So, I said “in general” and that’s one of those caveats that you pay for certainty. And since they work through all these other issues, um, you, you’ll be paying for that and when it comes to paying for that business another areas where good legal counsel is important, because your rights as a franchisee are important because you’re, you’re at odds. You want to own the business as soon as you can and the person franchising it to you is trying to reap as much benefit that they can, making sure that you work with a lawyer that can help you navigate a fair outcome is very important. But, going back to the original, in general less risky but I would say much more expensive.