This is a question I believe a lot of people are asking themselves these days in America. There are so many people out there looking for a plan B, and not a lot of people really know what would be the best option for themselves. I am writing this article because I have a lot of experience in both scenarious.. I am the owner of multiple locations of two different franchises, and have served as a franchise advisory board member and advertising advisory board member for Palm Beach Tan, the largest tanning franchise in the country. I am also building a multi-level marketing business (or network marketing business), and my team is spread throughout the country, with people in almost every state in the U.S. I will argue the pros and cons of both options, AND I will let you in on a few secrets I have leaned the hard way that are absolutely critical to being successful in both situations.
Lets start with buying into a Franchise.
Here are some advantages:
1. Proven Business Model: There are many benefits to buying into a franchise, but the most popular is theoretically being able to open a business with a proven business model. The statistics show that about 80% of businesses fail within their first few years, but the chances of a franchise business failing is closer to 20%. The franchise percentages are skewed quite a bit though, because a franchise is much easier to sell, so what ends up happening is a failing franchise might go through two or three owners before it actually shuts own. The existing owner always has good excuses why it is failing and the new owner always thinks he or she is the savior and will be able to turn things around.. Sometimes the franchisor will take over the location to delay the inevitable because the last thing that want on their Franchise Advisory Ciurcular is store closures.. (they are generally in the business of selling franchises)
2. Help With Start-up: You get a lot of help starting your business and running it afterward. Many franchises are, in fact, turnkey operations. When you buy a franchise, you get all the equipment, supplies and instruction or training needed to start the business. In many cases, you also get ongoing training, and help with management and marketing. Your franchise will reap the benefit of the parent company’s national marketing campaigns, for instance.
3. Marketing and Branding: When you open up a new location that’s part of a franchise with a strong brand you are able to do SO MUCH more than other new business who is not part of a franchise. For example, if you open up a new Subway in your town, and if you did not do ANY advertising at all people would still walk into your location and buy sandwiches. (Unless your location was in a back alley where nobody could see you!) AND the budget you allocate toward advertising and marketing is much better spent for two reasons: One, you’re not throwing spaghetti against the wall to see what sticks – your franchisor should guide you on what works and what doesn’t. Two, your marketing: direct mail, business to business, radio, TV, etc. will be much more effective because people recognize the Subway brand and will open up your mail, or listen to your ads.
4. Buying Power: Your franchise will benefit from the collective buying power of the parent company as the franchisor can afford to buy in bulk and pass the savings along to franchisees. If you are an independent company you can except to pay more for inventory and supplies then if you are involved in a franchise.
Here are Some Disadvantages:
1. Royalties and Ongoing Costs: Most people don’t realize how much of your gross sales you really pay out every month to the franchisor, and other vendors they are partnered with. Traditionally royalties begin at 4% of gross sales and end up at 6% by the third year in operation. Next you will have a 1% advertising cost that goes toward branding advertising admin costs. They will probably force you into an advertising co-op which will be about 4% of gross. You will have some type of point of sale computer monitoring monthly fee for around $500. And don’t forget a lot of franchises have some type of reimbursement program for customers visiting multiple locations with gift cards and coupons. After all this is added up you end up spending about 11-13% on fees and group advertising. Even if you backed out 4% for the ad fund co-op since this is driving traffic to your business, you are still forking out 7-9% every single month! That adds up – trust me. It will be anywhere from $20,000 to $130,000 per year for small businesses, depending on your sales and fee structure!
2. Their Way or The Highway: The main disadvantage of buying a franchise is that you have to do it their way – sometimes right down to the way the napkin holders are filled. As a franchisee, you are not the one actually running the show, and some franchisors exert a degree of control that you may find terrible. In many cases a franchisor will enforce a policy that might work well for the majority of franchisees but it does not work well for some – it can actually cause a major cash flow crisis for some owners but the franchisor will not budge and actually force people out of business. (Trust me this happens I have actually seen it happen within my own franchise)
3. Ongoing Support? Not all franchisors offer the same degree of assistance in starting a business and operating it successfully. Some are just start-up operations and everything after start-up is up to you. Often times the franchisor promises ongoing training and support that just doesn’t happen.
4. Shark-Infested Waters: Buying a little-known, perhaps inexpensive franchise can be a real gamble. Just because a business is offering franchises is no guarantee that the franchise you buy will be successful. In some cases, franchising is the business; all the franchisor is interested in is selling more franchises. Whether or not the individual franchises are successful is irrelevant to them. This is not to say that no little known, inexpensive franchises are worthwhile, but just a reminder that any franchise you’re thinking of buying needs to be investigated carefully. Remember the franchisor is in the business of selling franchises, so be very fastidious!
Joining an MLM or Network Marketing Company.
1. Low Start-up Cost: The typical start-up cost for a network marketing company is around $200-$500, and with many companies you can actually get started for as low as $35, or even free. However, if you enroll for less than $50 you are usually not eligible for commissions until you upgrade or order some product or the service.
2. Unlimited Income Potential: More millionaires have come out of the MLM industry than any other industry – multi-level marketing is actually the most pure form of capitalism. An average person can literally go from being broke to making six figures a month if everything falls into place. If somebody gets in on the ground floor of a company before it hits the momentum stages, he or she is being mentored by a top leader, he or she is an extremely hard worker and does not give up easily, and he or she is an influential person (or he/she has built up an online influence) then it is only a matter of time before he/she builds up a massive residual or passive income.
3. Personal Growth Training: The network marketing business model works the opposite of the corporate world, where it’s dog eat dog. In network marketing all the top earners are usually the best teachers, not the best sales people. In order to get to the top of the pay scale you are required to have many people in your organization promoted to the top tier positions. For example, if some big shot decided to get involved in an MLM and the only strategy he used was to spend a truckload of money on advertising and personally enroll hundreds of marketers he would make some good money doing that, but he would probably not reach the top position in the company that way. Most compensation plans are designed to develop leaders. The leadership and marketing training that you gain in MLM is priceless for future endeavors.
4. Passive or Residual Income: When somebody builds a successful network marketing business they build an income generating asset that produces cash flow every month for work previously performed. If you wanted to have $5,000 a month in passive income risk free you would need over $1 million in a CD or other high yielding risk free account. I actually sold my first MLM business to another marketer right after I graduated college and used the money for a down payment on my first house. (It was producing a monthly cash flow, which turns it into an asset you can potentially sell)
1. It is not get rich quick: Some people are attracted to network marketing because it is presented to them as this magical formula where all you have to do is sponsor three people who sponsor three and so on, then you have have this massive organization below you after three months that is bringing in $10,000 a month. Yes there are some occasions where people get in with a new MLM and have a large database of people they can tap into and they build a large income very quickly. It usually takes at least 1-2 years before decent residual income starts coming in.
2. Many choices: There are so many different MLM’s out there with all of their distributors claiming they “have the best product ever invented” and nobody else can compete with their company. One of the main reasons there is so much negative press around MLM is the competition between the different MLM companies cause marketers to bad mouth one company to make their company sound better. What this does is give the impression that MLM in general is bad, when in reality that is just not true. You can not believe everything you read online about a particular company, so you must do your own investigation before you join.
3. Must be self-motivated: You don’t have your franchisor out there doing radio and TV ads to promote your business, or a franchise compliance division coming into your store making sure your operation is running smoothly and efficiently. (not all franchises do this either, but you get the point) Your success is truly determined by how much effort you put into your business.
Which is the Better Way to Go?
This is the question you can only answer yourself, but please keep in mind a few lessons I have learned along the way:
-The franchisor is in the business of selling franchises so, again, be very careful. They have sales people who make anywhere from $2500-$5,000 per franchise location they sell. So this salesperson’s one main objective is to get you qualified and locked into a location.
-You MUST talk to as many owners as you possibly can about how they are really doing. Get numbers. Do not listen to the franchisor because they will stretch the truth about everything.
-If you can find an MLM company that is in the beginning stages, has some type of a marketing edge over everyone else (so you don’t have to go out and talk to everyone you know about the business), and has a powerful team of leaders you can directly work with and be mentored by, then I would think very seriously about choosing this path. Having the opportunity to start and own your own business for usually around $500, with the potential for cash flowing five figures a month in passive income in a relatively short period of time is much more enticing to me than risking hundreds of thousands of dollars on a franchise that is usually much riskier than people realize. However, if you do decide to join an MLM company make sure you do the research to find out if you will be with a rapidly growing company and will be personally mentored by top leaders in the company.
If you are somebody who is seriously considering one of these options, or already owns a business, franchise or not, and would like some advice on building a business or marketing your business schedule a free 20 minute coaching session with me or my partner. If you are not and are just doing your preliminary research I wish you well on all of your endeavors and findings.