Finding the Fit: Franchise Versus Independent Business
By David Grossman
Perhaps you have owned your cleaning company for a number of years, but growing it is becoming increasingly challenging. Or maybe you are considering leaving your employer and starting a cleaning business. Starting and operating a business all on your own has its benefits, but it can also be a daunting and lonely task. Whether you have been in business for a while or are just starting out, you may be better off finding a partner—in the form of a franchisor. Like so many things in life, joining a franchise system is a trade off. On the one hand, there is an initial cost and an ongoing fee. On the other hand, a franchisor with a solid track record can more than pay for itself.
So, when considering a franchise versus an independent business, how do you decide which is best for you? Let’s take a look at some of the key pros and cons of joining a franchise, as well as some considerations when selecting a franchise if you do choose that path.
Here are some of the key considerations of joining a franchise, starting with the downside:
- Fees: A franchisor typically charges $25,000-$100,000 to start and then 4-8% of revenue for use of their trademark, systems, and support.
- Autonomy: Being part of a franchise system grants you business ownership and the freedom that comes with it, but you are also agreeing to operate within certain parameters.
- Territory: Although it may be sizable, the geographic footprint in which you operate is often limited.
- Requirements: To keep uniformity across the entire brand, a franchisor usually has specific requirements regarding equipment and chemicals, services provided, hours of operation, cleaning protocols, and other aspects of the business.
On the other hand, there are many benefits of joining a franchise, namely:
- Start-up: Buying a franchise can be done quickly, and then starting your business or converting your existing business is also a short process. The entire process can be done in only a few months, a major benefit if you believe in the expression “time is money.”
- Odds of success: Think of a franchisor as an NFL team: They have a detailed playbook. A key benefit of this tool is that you will make many fewer mistakes than if operating as an independent business. Plus, you will spend significantly less time and money teaching yourself how to, say, restore marble or eradicate odors. It is not a surprise that, based on SBA loan default rates, franchise businesses as a group outperform independent ones, although there is a wide variety of performance across different franchisors.
- Support: Your franchisor wants you to succeed (because they capture a percentage of your sales, and unhappy franchisees will make it difficult to attract future franchisees). To that end, they typically offer assistance for many facets of their franchisees’ businesses, including operations, sales (which may be particularly needed for an existing independent cleaning business), administration, finances, and human resources.
- Camaraderie: One benefit not often considered is the network of fellow franchisees which can be a strong source of advice and ideas.
- Savings: Most equipment, supplies, and chemicals must be purchased through the franchisor or one of their affiliates. This requirement is to ensure uniformity and quality, but it also can result in a cost savings since many franchisors have buying power generated by the volume of purchases across the network.
- Exit: Though you may not be thinking about it when starting your business, selling a franchise is usually much easier than selling an independent business. You are likely to sell the franchise more quickly and at a higher profit multiple (even after accounting for the franchisor’s sale fee).
How to select a franchise
Once you do decide to explore a franchise, the big decision is which franchisor to choose. Key factors in this decision include:
- Geography: The franchisor must have territories available in your location. Some franchisors carve up every city into small areas and others grant large regions.
- Track record: Each year franchisors are required to file a Franchise Disclosure Document, a long legalese document. However, there is much useful information inside about their track record, requirements, and current performance of their franchisees.
- Fit (size and culture): An often-overlooked consideration is fit. Do I like the culture? Do I want a small entrepreneurial environment, or do I want a large formal situation? Questions like these are important to assess whether you will work well with the franchisor.
- Financial situation: It goes without saying that you want to join a franchisor with adequate financial resources to thrive and support you for many years. You may also want to inquire about their ownership (private equity owned companies, as an example, tend to sell every five years) and primary revenue streams (are they making most of their money off your royalty, marking up chemical sales to franchisees, or selling new franchises).
- Validation of current franchisees: The sentiment of existing franchisees and their level of satisfaction, as well as their prior backgrounds will shed some light on how well you can expect to perform.
- Franchisee role: Some systems are geared for smaller franchisees—the proverbial “man in a van” where the franchisee spends the bulwark of time performing the cleaning. Others are geared for more leader-focused franchisees who rarely work in the field but instead manage a team of workers while marketing for new business.
- Buy-in cost: While many financial institutions provide financing, the start-up cost may disqualify some franchise systems from your consideration. Note that, while a franchisor has limited ability to change the terms of the franchise agreement, for an owner of an established business the franchisor may allow for a reduction on the initial fee or phase-in the ongoing royalty.
- Support: Most franchisors do a good job at teaching their system of cleaning, but it is a mixed bag as to their effectiveness in helping their franchisees win customers.
- Management: Arguably the most important factor to consider when choosing a franchise system is the quality of the management team. Are they committed to helping you succeed? Will your relationship remain strong when you invariably encounter a challenging situation? Your franchisor is your partner, and your relationship with them—which could well last twenty years—is of paramount importance.
To guide you through the process to find an appropriate franchise is a cottage industry of franchise brokers. There is no cost to you, as these individuals are compensated by the franchisor, so pursuing a franchise may be something worth considering. In joining a franchise, you can operate a business for yourself but not completely by yourself.
David Grossman is President of Renue Systems Inc., a global franchisor and operator of specialized deep-cleaning services businesses to the hospitality industry. He can be reached at [email protected] with more information available at renuesystems.com.