By the Numbers: Ed Arvidson on Franchising

If your are considering starting a retail specialty coffee business, then one of the questions you may already have asked yourself is: “Should I go it alone, or should I consider purchasing a franchise?” There are certainly potential advantages and disadvantages to both options, so you’ll have to evaluate the pros and cons, do your research and make a decision that best fits your budget , expectations and acceptance for risk.

Considering a franchise

Franchises can offer several advantages over attempting to start a business on you own.

Obviously, if someone is offering a franchise opportunity, and they’ve been around for years, and have multiple operating franchise locations, you can probably assume they have a concept and formula that works. It would be reasonable to have the expectation that their business model might work for you as well.

Other advantages of considering a franchise are:

• Acquiring bank financing may be easier since the franchise company can show hard numbers of success and failure rates for its franchisees.  Considering that statistics show that approximately 95 percent of all new retail foodservice businesses will fail within 24 months of opening, in comparison, even a 50-percent failure rate might look stellar to a bank!

• Assistance will probably be provided in the areas of location selection and lease negotiation. These two variables can position your business for success, or failure, before you ever open your doors.

• Assistance will probably be provided with store design and layout.

• All decisions about equipment and consumable product selections will be made for you.

• Decisions about menu items will be made for you and guidelines are suggested for pricing, although ultimately pricing is set by franchisees.

• Assistance will probably be provided with employee hiring, training and store opening.

• You might be able to acquire better pricing on equipment and consumable products because of the franchisor’s special pricing arrangements with manufacturers and distributors.

• All operational procedures, systems and forms will be supplied to you.

• If you are facing operational or profitability challenges, you will probably have an expert resource to turn to for help or advice.

On the other side of the coin, there are a multitude of reasons you need to exercise caution when considering a franchise opportunity.  Many of these concerns are related to the assumptions made about the advantages of considering a franchise.  In other words, is it really a viable concept, what services and assistance will be provided, how advantageous are the decisions that will be made for you by the franchisor (that you will have no control over), etc.

Possible concerns or pitfalls in purchasing a franchise might include:

• The franchise company has a very short or nonexistent track record; it can’t be determined whether it is a wining concept or not. Also, the personal integrity of the franchisor may be an unknown.

• The franchise company may not be in good economic health and may go out of business, or make bad business decisions because of financial restraints that ultimately affect your chances for success.

• The majority of the franchisor’s current franchisees are struggling to survive in their businesses.

• The franchise company has an interest in you getting into the business.  Will they really be looking after your best interest in location selection and lease negotiation?

• The products the franchise will require you to use may be inferior to those being used by your competitors, putting you at an immediate disadvantage.

• The franchisor may be taking a mark-up on all the equipment and consumable products that you are required to purchase through them; however, any franchisor mark-ups should be explicitly and legally disclosed in the contract. It pays to carefully examine the details of any required purchases because in some cases these requirements may make the prices you pay higher than what you could obtain on your own.

• The “cookie-cutter” concept for the franchise may not be a good fit in your market or location.    

• Other franchisees in your area may not be running good operations, which could indirectly affect your business as well.

• The franchise agreement will probably limit what you can do, so you may not have the flexibility to offer new products, menu categories, or business features that could enhance or save your business.

• The franchise company will require that you pay a monthly franchise fee, which may be a significant percentage of your gross sales (3-7 percent?).  They will require that you pay this monthly fee whether you are realizing profits or not; and, even if you are profitable, this fee may reduce your personal income from the business to a level which would be equivalent to, or less than, being employed by someone else. (Do you really want to invest hundreds of thousands of dollars to merely provide yourself with a job?)

• The franchise company may charge you an additional percentage of sales or a monthly fee for advertising expenses.  The question is, could you implement a more effective campaign for your market and business, if you had that money to invest in advertising?

Certainly, if all of the above mentioned risk factors have been addressed and are acceptable to you, and you don’t mind sharing the monthly income from your efforts with the franchisor, a franchise may be an acceptable alternative that could potentially decrease the chances of losing your entire investment!

Opening your own business

The alternative to buying a franchise is to open your own coffee business. This will require that you do extensive research and planning, and/or get help from a qualified industry professional. Now, I’ll admit, that because I am a consultant, I am bias towards this option!

A good consultant can help with all or most of the same aspects of business creation and start-up that a franchise company can, for an equal or lesser cost.  The advantage is that a consultant is getting paid a fee for service, and will not be taking a percentage of your income; for the life of your business.

Admittedly, there may be a couple of areas where a consultant may not be able to provide you with the same advantages that a franchise company might.  The first is providing an “in” to acquiring bank financing.  The second would be securing better pricing for equipment and consumable products, because of negotiated prices based upon buying in large volumes.

The big advantages of “going it alone” is that it will allow you to develop your own unique concept, geared to your local market.  You will be able to dictate the design of your store, drive-thru, or kiosk. You will be able to select the items you desire to serve on your menu and use the products of your choice. You’ll have the flexibility to make changes if desired or necessary. And, most important of all, you keep all the income!

Ed Arvidson is president of E&C Consulting Inc., and an instructor at the Los Angeles Coffee Business School (www.lacoffeeschool.com). The information in this article is available in detail in Ed’s new 325 page book: “Coffee Business Success in a Turbulent Economy,” at www.coffeebizhelp.com or call Ed at (541) 317-0555.