Franchising is big business in the UK but, despite this, there are still some myths and misconceptions surrounding this lucrative business model. Today, we’re going to tackle one of the most common questions regarding this model – are franchises considered small businesses?
Franchises & Small Businesses
While franchises and small businesses are both entities that you can own, there are some fundamental differences. In this article, we’re going to look at some of the differences – and the similarities.
The small business – The term ‘small business’ can cover anything from a marketing agency to an e-commerce store. A small business will generally be a privately owned corporation, partnership or sole proprietorship and will employ less than 50 people. A small business or SME (small to medium enterprise) will usually be a company started from scratch by an individual or a partnership with either private funding or finance from a bank or other organisation.
The franchise – Like the small business, a franchise will often employ less than 50 people and will require funding from an individual or partnership. Franchising is the act of buying into an existing brand in order to go into business for yourself without having to start from scratch. A franchise’s main benefit is that you don’t have to start a brand new business as you’re tapping into a product or service that is already established.
What’s the difference?
Quite a lot, actually – while small businesses and franchises do share some characteristics, there are also some very fundamental differences and, these are:
The small business – When you start up your own business from scratch, that business belongs to you (or you and your partners) until you either sell it or otherwise disband the company. The rights to your business will be registered with the appropriate authority and will show you as the owner.
The franchise – When you open a franchise, you only ‘own’ your business for the duration of a set contract – for example, one year or five years. The franchisor will usually reserve the right to decline the renewal of a contract, at which point your interest in the business will end. In this respect, franchising may be considered, in some cases, to be ‘renting’ a business rather than owning it.
Putting your money where your mouth is
When starting any kind of business, you can expect to have to make an initial financial investment and, this differs slightly between a small business and a franchise:
The small business – Those starting a business from the ground up will be responsible for covering all initial costs – from business premises to equipment, materials and staffing, and marketing and promotion. Depending on the business, these costs can be significant and will often require the business owner to source funding from a bank or financial organisation.
The franchise – Like the small business, a franchise will normally require an initial financial investment which may be gained through a loan. However, the difference here is that the start-up costs for a franchise will generally be significantly lower than when starting a business from scratch.
Understanding the overheads
The small business – When running your small business, you will be responsible for assorted ongoing costs and, all profit will go into your bank account.
The franchise – As with the small business, a franchise will require you to meet regular financial responsibilities. On top of this, you’ll be required to pay a monthly royalty fee which is usually calculated as a percentage of your takings.
Hitting the source
If you’re starting up a business that sells physical products, there’s a big difference between a small business and a franchise:
The small business – With your small business, you’ll be responsible for sourcing products and materials yourself and for negotiating and renewing contracts.
The franchise – When signing up to a franchise business, you’ll gain access to established suppliers, and the franchisor will take care of all negotiations. In this instance, you’ll also benefit from highly competitive prices as the franchisor will be negotiating on a large scale.
Whatever kind of business you’re starting, you’ll need one important thing – customers:
The small business – Before launching your small business, you can expect to invest significantly in marketing and promotion to attract customers to your product or service.
The franchise – With a franchise, you’re selling a product or service that already has an established customer base. While you will still need to invest in promotion, this investment will be significantly lower than going it alone.
The Day To Day Operations
One of the biggest differences between a small business and a franchise is in the day to day operations:
The small business – As the owner of a small business, you will have full control over how the business is run and the strategies and guidelines which are put in place, including staffing, quality control, health and safety and more – you will also be responsible for meeting the costs involved in putting these things in place.
The franchise – Your franchise package comes with ready-made operational guidelines, which must be strictly adhered to according to the contract you signed. While you will be responsible for making sure these guidelines are followed, you won’t need to make any financial investment in this.
Branding is an incredibly important part of any business and, this is another major difference between the small business and the franchise:
The small business – You pretty much have free reign over your branding when starting your business from scratch. You have total control over your logo, brand name and tone of voice – including the right to change it should you feel that a re-brand is in order.
The franchise – As part of a larger brand, you will generally not be permitted to make any changes to the company’s branding in any way.
A helping hand
Running a business can be tough and often involves keeping a lot of balls in the air at any given time – meaning that, from time to time, you may find yourself feeling overwhelmed:
The small business – Unfortunately, when you own your private business, all the stresses and strains land squarely on your shoulders. For some business owners, this can lead to frustration and a very real sense of isolation.
The franchise – Joining a franchise can be compared to joining a family in that you will have a ready-made support network and can expect training, support and guidance from both the franchisor and your fellow franchisees.
As you can see, the differences between a small business and a franchise far outweigh the similarities. Although both scenarios allow you the freedom of working for yourself and give you some control over your earnings, the differences can be summed up as follows:
Investment – A small business will cost you more to set up and get up and running than a franchise. Additionally, banks and financial companies will usually be more willing to grant finance for a franchise than a brand new company.
Risk – With a brand new small business, there is always a risk of failure, which means that you may lose your investment. A franchise is a tried and tested entity that has a significantly higher chance of success.
Autonomy – When running a small business, you are able to control all aspects of the running and branding – which means that you may make mistakes along the way. With a franchise, these decisions are made for you, which means less control but also less chance for error.
Costs – With a franchise, you will be liable for monthly royalty fees, which are not applicable with a small business. A franchise will, however, usually net you more sales and, therefore, profits.
For those going into business for themselves for the first time, a franchise offers all of the benefits and less of the risk – which makes good business sense every time.