According to the data from the Bureau of Labor Statistics, an estimated 20% of small businesses fail within the first year of inception. With over 33 million small businesses across the United States, some of them, whether small or large are bound to fail.
In the last few years, the business sector has undergone a tremendous transformation. Starting and sustaining a restaurant business is not an easy task for business owners in the current economic climate, particularly in the food industry where customers' demands and expectations have changed more than ever.
If you’re someone looking to start a restaurant business and aren't sure whether to build it independently from the ground up or invest in an established franchise business, the first thing you must do before making a final move is to understand both the models to the core and weigh all the pros and cons associated with them.
Factors to be evaluated before reaching a final decision
According to a survey conducted by the National Restaurant Association, an estimated 50% of operators expect to make fewer profits in 2023. Whether you’re thinking about starting an independent restaurant or considering investing in an already established franchise business, the types of potential pitfalls and rewards may vary. While one is not proven to be more successful than the other, there are certain factors that you must consider before making a final decision. Some of these factors include:
- Ownership model
A franchise restaurant business is entirely different from an independent setup. Unlike individual business owners, franchisees lack the freedom to alter or modify offerings and processes to keep up with the evolving market conditions. To a large extent, the power of decision-making for every aspect related to business processes, product lines, etc is with the parent company, i.e the franchisor. But, in the case of an independent restaurant business, an individual business owner holds the full authority to make adjustments to their offerings and business operations.
Both an independent restaurant and a franchise business require hefty investments. When you own and operate your own restaurant, you are responsible for paying all necessary overhead costs such as marketing, inventory, raw materials, and equipment. The difference however is that you have the power to decide how much to invest, when to invest, and in which area to invest. However, if you invest in a franchise business,there are certain one-time fixed costs and certain recurring expenses which are non-negotiable. These are one-time franchise fees, a fixed percentage of royalty, marketing and advertising contribution, etc. to the franchisor.
- Return on Investment
The primary objective of any business is to make money. The franchise model and an independent business model vary in terms of day to day operational expenses, marketing expenses, fixed expenses, and also the profitability. It is crucial to evaluate and compare the ROI on both the models and ascertain if it aligns with your financial goals. This should be the biggest factor in determining whether to go for a franchise or an independent business.
To assure maintaining a favorable brand image in the market, a franchise restaurant is given ongoing support from its franchisor. Also, the parent firm provides a franchise training programme to assist franchisees in comprehending the business model and acquiring the information and abilities necessary to successfully operate a franchise location. Yet, starting a business from scratch is no easy task, especially if you're an aspiring entrepreneur who lacks the knowledge and experience of operating a firm in the past. It necessitates that you invest sufficient time in studying current market trends, conducting a competition analysis, determining your target market, and developing a potent marketing plan.
Franchise restaurant business
In a franchise restaurant business, the power to make decisions is in the hands of the franchisor. However, to ensure the successful running of the business, the franchisor provides essential training to franchisees at the unit level. This means you don’t need to have prior experience in the field. For instance, McDonald’s, the largest fast-food restaurant chain, offers all of its franchisees 12-18 months of training to ensure seamless operations at the unit level. The chain also provides operator training courses conducted by local training professionals. The primary objective of such training initiatives is to boost sales and profits across all outlets while also maximizing quality, service, and cleanliness.
While there are many pros to investing in a franchise model, the business also possesses several challenges and disadvantages. According to Investopedia, purchasing a franchise business is undoubtedly an expensive business model, with an overall investment ranging from $500,000 to $1 million. In addition, it comes with several other costs and miscellaneous expenses such as franchising fees, royalty fees, licensing fees, etc., which further results in reduced profits. there are several other pros and cons associated with the franchise restaurant business and these include:
- No prior experience is required to run a franchise outlet
- The risk of failure is fewer in the franchise concept
- Necessary training is provided by the franchisor to the franchisee.
- Franchise business comes with instant brand recognition.
- Franchisees have little or no control over the brand.
- The decision-making power is in the hands of the franchise owner.
- Franchise business has high acquisition cost and includes Royalty fee.
Independent Restaurant Business
An independent restaurant business is established and run by an individual owner. In this type of business setup, the restaurant owner has complete discretion over all business-related choices and decisions.From location to the menu to theme everything is decided by the owner without any limitations or restrictions. While owning a small business has many benefits, there are some drawbacks as well, some of which are as follows:
- The entire control is in the hands of the restaurant owner.
- Investments needed to run a standalone restaurant are low.
- All profits are pocketed by the owner.
- The risk of failure in this setup is higher as compared to a franchise business.
- Operating a standalone food business successfully requires a lot of time and effort.
- A lack of standard policies and rules leads to operational inefficiency.
Wrapping it up
Considering the aforementioned advantages and disadvantages of standalone restaurants and franchising, it can be inferred that franchise businesses present an excellent starting point for ambitious entrepreneurs. On the other hand, the independent restaurant business model gives entrepreneurs the opportunity to fully utilize their creativity and incorporate it into their enterprise in order to accomplish desired results. Additionally, it allows them the adaptability and agility needed to cope with rapidly changing market conditions. While both business models have their own unique benefits and drawbacks, choosing the right one needs thorough research and evaluation. Therefore make sure you spend enough time doing your homework before making a final decision.