🍟 6/13/2022 – Buying a Franchise vs Starting a Business
Buying a Franchise vs Starting a Business
Franchises Aren’t For Everyone
There’s a good chance you’re reading this newsletter because you have dreams of owning your own business. Or maybe you’re already an owner and are considering expanding.
Hopefully you know there’s merit in the franchising, but some people have their doubts – and honestly – I can’t blame them. There’s 4,000+ franchises in the US alone, and all it takes is a few bad actors to give the “industry” a bad name.
However, those who prefer to go 100% on their own must acknowledge how much more of a challenge it is. As a small business founder, YOU have to figure everything out.
For some people that’s no problem. They have the creativity and ability to build their own brand and business, or they simply know themselves well enough to know that their personality type doesn’t fit the mold of a franchisee.
The 7 Key Benefits of Franchises
Yes you have to pay a franchise fee and ongoing royalties, but there are distinct benefits to buying a franchise versus starting your own business.
The reality is (as my handy-dandy pie chart mentions) that the brand you choose can make a world of difference in the success you have.
So keep in mind as we go through the 7 key benefits that this is what you get when you do pick a winning franchise brand!
1. Speed to Market
Franchisor’s give you the playbook for site selection, buildout, marketing, hiring, and more. You don’t have to figure out these details yourself.
The average person that buys a franchise today will likely have a far smoother opening process than the same person who is starting a business from scratch.
2. Risk Mitigation
If you’re starting a business for the first time you’re likely going to make mistakes. Mistakes cost time AND money.
A good franchise largely eliminates mistakes for you, because the franchisor already made them and has adapted the playbook accordingly. Additionally, there’s already a level of proof of concept for this business via the franchisor and other franchisees who have already opened locations.
This is a massive advantage that shows a higher likelihood (thought certainly not a 100% guarantee) of success. The more locations that are opening and operating successfully, the less risk there should be for you!
3. No Experience Required
Top franchises have their marketing and operating systems dialed in, enabling them to turn people from many backgrounds into successful operators.
If your dream is to own a restaurant but you have a 20 year career in corporate America, your chances of making it in the restaurant industry are far higher going the franchise route.
4. Supply Chain Efficiencies
At scale, many franchises offer cost savings on the inputs to your business. With hundreds of locations open, the franchisor can negotiate lower prices on supplies for the system as a whole.
This means that you should be able to purchase your goods for cheaper than if you had opened up your own independent business.
5. Strength in Numbers
As the franchise you join opens more locations regionally, nationally, and even internationally, the increased awareness and marketing for the brand will undoubtedly benefit your locations.
A rising tide lifts all boats.
6. Easier Expansion
When you have location #1 under your belt and want to expand, you replicate exactly what you’ve already done. The software is the same, the buildout is the same, the hiring process is the same.
There’s minimal adjustments (if any at all).
Compare this to the SMB acquisition route, where not only do you have to be scouring the market for good deals (which may or may not be available when you want them), but each business also comes with different supply chains, software, etc.
7. Brand Equity –> Higher Exit Multiples
Because of the strength in numbers, franchises can create some incredibly strong brands. This is incredibly important to private equity firms that are constantly looking for dependable returns from their investments.
Assuming all else equal, a private equity firm will pay more for 12 Dunkin’ locations than 12 locations of a 1-off coffee chain.
Why? Dunkin is an international brand with a huge customer base and a seven to eight figure marketing fund. Investing in a small coffee chain competing against that offers potentially more upside, but also much more downside risk!
Franchises have clear benefits from start to finish. While you have fees to pay, they should be well worth it in the end!
Franchise Group to Acquire Kohl’s
Franchise Group, whose holdings include Pet Supplies Plus, The Vitamin Shoppe, Sylvan Learning, and more, is expected to acquire Kohl’s in a $9B deal. While Franchise Group will contribute about $1 billion to to the transaction (funded through an increase in its secured debt facilities) it won’t be liable for any other financing. Given all the real estate Kohl’s owns, I can see why Franchise Group is keen on this acquisition – even if Kohl’s struggles, they have concepts they can plug in if need be.
Focus Brands Largest Zee Receives $44M
The largest franchisee for Focus Brands, the holding company for classic brands like Auntie Anne’s, Jamba Juice, Cinnabon, Carvel, and more, is about to get a lot bigger. Fresh Dining Concepts, based out of Miami, already owns 160 Auntie Anne’s, Carvel, Cinnabon, and Jamba locations – and was just given $44M in financing, which will be used for further M&A and new store development.
Tim Hortons Justin Bieber
Tim Hortons is going all in on Justin Bieber, not only bringing back the limited-time “TimBiebs Tim Bits”, but also launching a line of cold brew called “Biebs Brew”. TimBiebs were able to help raise same-store sales growth 10.3% in Q4 2021 for Tim Horton’s, and I expect this can have a similar impact. Call me a Belieber!
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