Some prospective business owners may ask, "Why should I invest in a franchise business when I can open my own independent business in the same industry?" The implication is that the first time business owner can do just as good a job opening their independent business as the franchise system does in opening its new outlets. And, since an independent business doesn't pay royalties the novice independent business owner will put more money in their own pocket.
If we check the data, this turns out not to be true in almost all cases. Actual data shows that in those industries in which franchise systems operate, franchised establishments produce 60% more revenue than independent establishments. Do you want 60% more revenue in your new business?
There are many, many factors that work together to give these results. Let's look at just two of these factors today. Franchised business establishments end up hiring about 30% more employees than independent business establishments. More importantly, each of the franchise employees produces about 24% more revenue per employee than employees of independent business establishments. These two factors multiplied together (1.30 more employees x 1.24 more revenue/employee = 1.60 more revenue) gives the 60% higher revenue.
The franchise employees are more productive than the independent business employees. Again, there are many, many factors that work together to make this so. Among them typically are better recruiting programs, better training programs, better operating systems and economies of scale.
But does all this put more money in the first time business owner's pocket? That is the key question. In addition to franchise businesses having higher revenue they also tend to have lower expenses expressed as a percentage of revenue. One of the biggest expense line items in many industries is labor. Labor is frequently expressed as a percentage of revenue in a profit and loss statement.
Since franchised business have more productive employees their cost of labor expressed as a percentage of revenue is much lower than independent businesses. For those who like math, a 24% increase in revenue per employee translates to a 19% reduction in cost of labor as a percentage of revenue. Would you like a 19% labor reduction to go with your 60% higher revenue? And, would you like an apple pie to go with your cheeseburger?
A well-run franchise system will help reduce the cost of every other line item expense on the P & L Statement as well. As a percentage of revenue, the franchised establishment will have lower cost of goods, lower overhead cost, lower selling, general & administrative (SG & A) costs, lower cost of debt service (assuming a first time independent business owner can even get financing) than the independent business owner trying to compete with them.
These are some of the reasons why astute business owners choose to wisely invest in a well-run franchise system. With higher revenue and lower costs, after paying a royalty, they end up with more money in their own pocket.
The author, Kent Craven, is the longest tenured office owner in FranNet. FranNet has worked with SCORE Chapters nationwide since 1987 to help educate prospective business owners about franchising. Contact him at www.frannet.com/kcraven or by phone at 602 224-9333 ext. – 2.
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