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Start-up Businesses: Pre-fab or Do It from Scratch?

Any person with an entrepreneurial mindset must consider countless options when deciding whether or not to start a new business. One fundamental decision that must be made at the threshold is whether to create a business from the ground up solely in the entrepreneur’s vision, or invest in a developed concept that has been franchised and made available for acquisition.

Some recent articles suggest that the trends are strongly towards the franchise model, a trend that has become accelerated by the recent economic downturn. One recent FoxBusiness article analyzingfranchise development points out that the sense of ownership and self-control that is so essential to the success of a “Mom and Pop” store can be duplicated to a certain extent in a franchise situation. However, there is always a tradeoff involving a loss of some control. In exchange for the business plan, name recognition and trademark that the franchisor has developed, as well as training and other support resources, the franchisee gives up a substantial portion of revenue and must subject itself to the system controls imposed by the franchisor. As that article notes, quoting the president of the IFA, “Some entrepreneurs are so independent-minded they don’t want to give up control of any aspect of the business …For those business people, fitting into the structure of the corporate business isn’t for them.” However, for those business people who can sacrifice some part of their own vision to take advantage of a system, the franchise model offers enormous cost and time savings advantages.

A recent article in Kiplinger on franchise growth and lending trends, states that from 2000 to 2008 the number of franchised restaurants grew by 20%, while the number of independent restaurants contracted by 4% over the same period. The article predicts that this trend will continue, observing that franchised businesses are “typically better positioned than mom-and-pop shops to survive downturns, benefiting from a strong brand presence, corporatewide marketing campaigns and access to advice and mentoring from the franchisor. Plus they can often offer customers — and get from suppliers — steeper price discounts. ” That article also points out that lenders are more comfortable with franchised businesses, noting “lenders have a slight bias toward franchises…generally, bankers tend to perceive franchises as less of a risk. There’s a greater willingness to lend to them…adding that loans to franchisers also tend to be larger compared with loans made to independents.”

So do these trends signal the end of the maverick entrepreneur who singlehandedly changes what we eat, wear and buy? No, of course not. Economic trends, particularly the negative ones of the past year and a half, may alter the direction many start-up businesses take in getting started. Buying an established business concept may seem like the far safer bet in a damaged economy. But there will always be those who buck the trend. This country and this economy will sometimes richly reward those who think and act for themselves, and the lure of that unique brand of success will always be there.

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