A lot of Americans seem to think that supporting small business means avoiding chains. That is not exactly accurate. A lot of chains are franchised. A franchise is a small business dressed up to look like a big business.
I recently entertained the idea of buying into a franchise. I eventually reached the conclusion that this is not the right direction for me, but I did get deeply enough into the process to understand the financials.
A franchiser is usually some big or growing company looking to expand their brand. They recognize that as they expand, it becomes increasingly expensive and difficult to maintain standards while running every branch directly. They decide that it would be more cost effective and could deliver a higher quality product across the organization if they kept the face of the business small even as they continued to grow. In order to do this, they begin seeking individuals who have achieved a minimum of net worth and liquid assets, and who have strong enough credit to secure a loan, to open a franchise.
Meanwhile, the franchisee candidate is someone who wants to build something of their own. Perhaps that person is tired of corporate life, or they just want to be their own boss for once. They have spent a lifetime acquiring the means to take a big swing at life, but they lack the knowledge or expertise to build a business from scratch, and that makes them trepidatious to go it totally alone.
It is a marriage of convenience. The franchiser has the name recognition, the systems, the knowledge, the product. The franchisee has the desire, the means and the drive to build a profitable business, with a little help. Depending on the style of franchise there may also be a network of franchisees with whom the prospective franchisee can share best practices, and possibly even collaborate. (One of the businesses I looked at had situation where it was too expensive for every franchisee to own every type of equipment, so they would contract with each other on different types of jobs.) A successful franchisor often tries to foster a sense of community among their franchisees, as a means of generating greater buy-in from existing and prospective members.
In return for the support of the franchisor and the use of their product, the franchisee pays a hefty licensing fee, purchases equipment from the franchiser and agrees to pay royalties (monthly/quarterly/annually) for the right to continue representing that company. The initial investment by the individual franchisee usually begins in the low six figure range. The franchisee is also responsible for numerous additional expenses, which include rent for the location, insurance, training and salaries for employees, expenses related to upkeep of the location, marketing, potential technology fees and anything else not covered by the licensing agreement. Choosing how to pay employees and what benefits to offer may be the individual operating decisions of a given franchisee.
And those are just the monetary commitments. To get a franchise up and running requires a tremendous time commitment. There is the coordinating of contractors and vendors to get the location ready for business, possibly the acquiring of permits, the hiring and training of employees, plenty of tedious but careful budgeting, and the regular old sweat equity, rolling up your sleeves and making sure first-hand that everything starts off rolling in the right direction. For some franchisees this may also include becoming the day-to-day, on-sight manager of the operation. For others it may mean hiring someone to manage in their behest.
But the more people employed, the more paying them cuts into revenues. And remember, by the time the doors open for business, the franchisee has probably run up hundreds of thousands of dollars of debt. There are the various fees paid to the franchisor, plus all the capital expenses and the operational expenses. It may be months or years before the franchisee achieves a net positive on their investment.
My point is that if you believe in supporting small businesses, that does not mean that you must avoid chains. There are some corporate stores out there, but many chain establishments are also small businesses. If that particular branch of a chain is relatively new, the owner may have become deeply leveraged in order to open up. By avoiding them, simply because they are part of a chain, you may actually be harming a small business.
Do not always assume that a book can be judged by its cover. Around the time I moved into my current neighborhood, I began to frequent a local location of a franchised bar. I like the food, the company, and especially the bartenders. I recently discovered that one of them is the daughter of the owner. Corporate has just mandated a menu change, so I asked her about how much control they have over that sort of thing. It seems it is a bit mixed. She told me of one dish that was totally gone because it included an ingredient that had been supplied by corporate. But she also mentioned some other things that they transferred to their local specials menu, because they were popular locally, even if they weren’t popular across the rest of the chain.
I used to work for a local television station. They were a small business too. They purchased their primetime programming from a big broadcast network, and they purchased a bunch of syndicated programming from various vendors. But they also produced their own news locally, right there in the market. They were owned by a station group, which also owned other television stations in other markets. Occasionally they were required to run programming that had been mandated by the parent company. But essentially, that television station was a small business, with less than a hundred employees.
Things are not always what they seem on their face. If you are not looking deeper than the surface, then you are not really looking at all.
