Franchise vs Independent Restaurant - Which Business Model is An Ideal Choice?

According to the Bureau of Labor Statistics, an estimated 20% of small businesses fail within the first year, and the United States is home to more than 33 million small businesses. Some of them, whether small or large, are bound to fail.

Over the last few years, the business sector has changed dramatically. Starting and sustaining a restaurant is hard work for owners in the current economic climate, especially in food, where customer demands and expectations have shifted more than ever.

If you want to start a restaurant and are not sure whether to build it independently from the ground up or invest in an established franchise, the first thing to do before making a final move is to understand both models to the core and weigh the pros and cons of each.

Factors to evaluate before reaching a final decision

According to a survey by the National Restaurant Association, an estimated 50% of operators expected to make less profit in 2023. Whether you are thinking about an independent restaurant or an established franchise, the potential pitfalls and rewards vary. One model is not proven more successful than the other, but there are factors you must consider before deciding. They include the following.

Ownership model

A franchise restaurant is entirely different from an independent setup. Unlike individual owners, franchisees lack the freedom to alter offerings and processes to keep up with changing market conditions. To a large extent, the power to make decisions about business processes and product lines sits with the parent company, the franchisor. In an independent restaurant, the individual owner holds full authority to adjust offerings and operations.

Cost

Both an independent restaurant and a franchise require heavy investment. When you own and operate your own restaurant, you pay all the overhead costs such as marketing, inventory, raw materials, and equipment. The difference is that you decide how much to invest, when to invest, and where. If you invest in a franchise, certain one-time fixed costs and recurring expenses are non-negotiable, including the one-time franchise fee, a fixed royalty percentage, and a marketing and advertising contribution to the franchisor.

Return on investment

The primary objective of any business is to make money. The franchise model and the independent model vary in day-to-day operating expenses, marketing expenses, fixed expenses, and profitability. Evaluate and compare the ROI on both models, and confirm it aligns with your financial goals. This should be the biggest factor in deciding whether to go franchise or independent.

Support

To maintain a favorable brand image in the market, a franchise restaurant gets ongoing support from its franchisor. The parent firm also provides a training program that helps franchisees understand the business model and build the knowledge and skills to run a location well. Starting a business from scratch is no easy task, especially for an aspiring entrepreneur who lacks prior experience running a firm. It requires that you invest enough time studying current market trends, conducting a competitive analysis, defining your target market, and developing a strong marketing plan.

Franchise restaurant business

In a franchise restaurant, the power to make decisions sits with the franchisor. To support a successful business, the franchisor provides essential training to franchisees at the unit level, so you do not need prior experience in the field. Many large fast-food chains put franchisees through months of structured training and operator courses run by local training professionals. The goal of these programs is to boost sales and profit across all outlets while improving quality, service, and cleanliness.

There are many advantages to a franchise model, but the business carries challenges and disadvantages too. According to Investopedia, buying a franchise is an expensive model, with an overall investment ranging from $500,000 to $1 million. It also comes with other costs and miscellaneous expenses such as franchising fees, royalty fees, and licensing fees, which further reduce profit. Other pros and cons of the franchise restaurant business include the following.

Pros:

• No prior experience is required to run a franchise outlet.
• The risk of failure is lower in the franchise concept.
• Necessary training is provided by the franchisor to the franchisee.
• A franchise comes with instant brand recognition.

Cons:

• Franchisees have little or no control over the brand.
• The decision-making power sits with the franchisor.
• A franchise has a high acquisition cost and includes a royalty fee.

Independent restaurant business

An independent restaurant is established and run by an individual owner. In this setup, the owner has complete discretion over every business decision. From location to menu to theme, everything is decided by the owner without limitations or restrictions. Owning a small business has many benefits, and it has some drawbacks too, including the following.

Pros:

• The entire operation is in the hands of the restaurant owner.
• The investment needed to run a standalone restaurant is lower.
• All profit goes to the owner.

Cons:

• The risk of failure in this setup is higher than in a franchise.
• Operating a standalone food business well takes a lot of time and effort.
• A lack of standard policies and rules leads to operational inefficiency.

Weighing the advantages and disadvantages of standalone restaurants and franchising, you can infer that franchises present an excellent starting point for ambitious entrepreneurs. The independent restaurant model gives entrepreneurs the chance to apply their creativity to the business and reach the results they want. It also gives them the flexibility and agility to cope with rapidly changing market conditions. Both models have their own benefits and drawbacks, so choosing the right one takes thorough research and evaluation. Spend enough time doing your homework before making a final decision.