Trying to decide on investing in a proven franchise concept or building a unique concept? This article covers everything you need to know about the pros and cons of starting a franchise vs independent restaurant. I also discuss the profitable potential, investment requirements and what’s easier to own. If you want to get matched with a franchise opportunity based on your interests and investment level, take our 7-minute quiz.
- What Is a Franchise?
- What Makes a Franchise Successful?
- What Are the Disadvantages of Franchises?
- What Is an Independent Restaurant?
- What Makes an Independent Restaurant Successful?
What Is a Franchise?
In short, a franchise is a business model. Franchise owners create a brand and business model and work with franchisees who pay fees to use the brand identity and work within the framework. While many people associate franchises with restaurants, other franchises include real estate, coding businesses, and more. In a franchise, a company has done the leg work to create a business, build a brand, and make a menu or system that benefits their business. Once this model is set, they offer the benefits of a prebuilt business plan to entrepreneurs, who invest an initial amount of funds and other fees to gain the benefits of the business.
There are two kinds of franchising: Business Format Franchising and product distribution franchising. Restaurant building focuses on the first style. In this style, a franchise owner has already created the playbook for their restaurant or business. Things like marketing strategies, layout, training guides, customer service protocol, kitchen design, and more are all provided to franchisees. In addition, franchisees get training on running the brand properly and have corporate supervision to fall back on should they have questions.
On the other side, franchisees pay for this success playbook in the form of royalties (ranging from 5% to 7% on average), as well as fees, costs, investments, and a loss of freedom in their business. If a franchise owner decides to do a system-wide remodel, the franchisees have little to no say. Franchise owners can dictate almost everything about a franchise location, including real estate choice, layout, menu, and how the franchisee spends their marketing funds.
Examples of Franchises
Visiting any shopping center in the United States gives many franchise examples. The franchise business model stands out across the hospitality industry, from fast-food restaurants to sit-down dining areas. While we could pull any number of popular restaurants as examples, some of the most famous American restaurants are franchises or were franchises at some point in their life.
For example, McDonald’s is one of the most successful franchises of all time. This restaurant set the bar for fast food and continues to flourish around the globe. McDonald’s is a franchise, meaning standards come down from corporate owners, so franchisees operate locations to industry standards. One of the benefits of the McDonald’s model is, with some minor exceptions like the New England lobster roll, everything on the McDonald’s menu is the same across the same geographical area: French fries at an Iowa McDonald’s taste the same as those in Florida. The Golden Arches may not be known for innovative cuisine, but it’s hard to find anyone who hasn’t heard of this influential chain.
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Another franchise example is IHOP. The International House of Pancakes is genuinely international, and this restaurant chain sports locations across the globe. While this restaurant maintains the feel of a breakfast diner, in reality, it’s far from the mom-and-pop breakfast stops of old.
Instead, IHOP keeps its brand identity as a local diner through corporate planning and an extensive breakfast menu. Every aspect of this franchise is tailor-made to create an association for their customers, meaning everything from their advertising to their “simple” menus works to create an expectation met at every one of their locations. While IHOP franchisees are unlikely to craft specialty pancakes or a secret menu for locals, they benefit from working alongside a global company with all the power that comes with it.
What Makes a Franchise Successful?
One of the marketing cornerstones is the idea of brand identity. If customers recognize a brand name and have positive associations with that brand, they’re already more likely to make a purchase. Consumer brand engagement (CBE) primes customers to interact with a business and, in turn, leads them toward making a purchase. In the franchise business model, franchise owners offer investors a prebuilt brand identity, complete with test groups, research, and all the customer information corporations can afford to source.
On top of brand identity and business formulas, franchise owners offer franchisees bulk buying power that’s out of reach for independent business owners. In addition, since franchise owners do everything on a large scale, they can negotiate better ingredient pricing, which benefits franchisees’ bottom lines.
Another benefit of franchising is that corporate has already done the math and made the mistakes for you. They have a set formula for a reason, and their training programs aim to create consistent business results with fewer mistakes and higher profits. This allows almost anyone with people management skills and a drive to learn to succeed at franchising, as the training is built-in, and restaurant experience can come along later.
What Are the Disadvantages of Franchises?
While franchises come with many benefits, they’re not without downsides. Franchisees can expect to pay serious upfront costs and fees when starting. Not only do franchise owners get between 5% and 7% of profits on average, but they also have hidden fees throughout their agreements. Training employees can bring fees and costs, and corporate may require seminars, conventions, and monthly marketing requirements, all of which cost money.
While an innovative entrepreneur may go out of their way to find a cheap contractor for renovations, with a franchise, you have to follow their every stipulation, including working with the suppliers and contractors they decide to work with. Lack of innovation is a huge boundary to starting a franchise location, as franchisees have little to no control over what they do with their business. If corporate decides the furniture needs to be pink and black leopard print, that will happen, despite what the franchisee feels or wants for their business.
On top of fees, costs, investments, and more, it’s been said it’s easier to get a divorce than to get out of a franchise contract. Franchise owners have fail-safes if franchisees decide to sell, and these stipulations can come with high costs and stress. That doesn’t mean it’s a bad idea to partner with a franchise, but you should be completely aware of the requirements of any contract or agreement you commit to before starting a franchise location.
What Is an Independent Restaurant?
An independent restaurant is a restaurant or hospitality business owned and operated by a separate individual or group. Unlike franchises, independent restaurants are directly owned by their owners, meaning they can create their own brand identity from scratch. In addition, an independent restaurant owner is in business for themselves or their business partners, meaning there are no royalty fees, no brand guide except what they make, and no corporate office to fall back on.
Corporate chains do not run Independent restaurants, and the restaurant owner makes the decisions. From where to build their restaurant, what to name it, what logo to use, and even what to make the tablecloths from, an independent restaurant owner is truly independent in all their choices. On the downside, independent restaurants have less buying power, operate on a much smaller scale, and have no corporate office to fall back on.
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Independent restaurants also require more restaurant or hospitality experience, as the owner needs to create and manage their business from the ground up. In addition, these businesses require a passion for the restaurant industry, a drive to succeed, a willingness to innovate, and plenty of startup capital.
Unlike franchises, independent restaurants can’t fall back on established brand identity to boost their business; they have to build that reputation from square one. However, being able to craft a brand identity from the start gives more freedom and allows for creative solutions and innovation not found in franchise chains.
Examples of Independent Restaurants
Compared to franchises, independent restaurants rarely have global name recognition. The average independent restaurant is the pub on that one back street, a pizza place locals always order from, or a diner that’s been around since the ’30s and makes excellent mac and cheese. However, independent restaurants are everywhere and fill in the gaps left by franchises. Sure, anyone can find a McDonald’s off every exit on the highway, but if someone is looking for a great burger, they seek out an independent restaurant.
Because they’re inherently local, independent restaurants live and die by brand recognition and word-of-mouth advertising. Their marketing is targeted and local, and they interact directly with their customers. While locals may not know the franchise manager of an IHOP, they’ve probably met the owner of a breakfast diner nearby or have regular conversations with the bar owner down the road from their work.
Independent restaurants are the soul of the hospitality industry. While they’re more volatile and risky from a business perspective, they can build meaningful customer relationships on a level a franchise owner can only dream of. In general, it all comes down to a matter of scale: independent restaurant owners are making one or a few restaurants shine. At the same time, franchisees look to create a successful business carved out of an already existing brand identity.
What Makes an Independent Restaurant Successful?
Independent restaurants succeed because of restaurant owners who are passionate about the industry. An independent restaurant relies on entrepreneurs willing to innovate, experiment, and face every challenge the industry throws at them. For independent restaurant owners, their restaurant is their livelihood. There are no royalties, no hidden fees, no cuts to plan for or corporate to deal with, and they are entirely free to make their own choices and mistakes.
Part of what draws in potential restaurant owners is the ability to decide everything about their restaurant. From decor choices and menu options to food quality, independent restaurant owner makes every choice in their business. While this means they have no one else to blame for mistakes or bad ideas, it also allows them to build the life they want.
What Are the Disadvantages of Independent Restaurants?
One of the benefits of independent restaurants also counts as its downside, namely that the owner is responsible for everything. There’s no backup training, no manual, and no tested and true method for making a restaurant succeed. Instead, owners are in charge of everything, including their own mistakes, and these mistakes can be expensive.
On top of no corporate support network, independent restaurant owners pay more for their food, as they can’t purchase in bulk or negotiate as effectively as franchise owners. Sure, restaurant owners can innovate new ways to cut costs on their menu and may be able to make local deals to cut down on overhead, but at the end of the day, this all depends on the owner.
Running an independent restaurant requires drive and some level of experience. While someone who has never worked in hospitality may be able to create a successful independent restaurant, they need to have a drive for the business, or they’re unlikely to make it in the industry. Restaurant owners must be willing to learn and learn fast, as every mistake costs them their own money. While creating a thriving independent restaurant is possible, there’s no manual on the best way to do it. Building a brand identity from the ground up takes time and effort compared to franchise options with built-in loyal customers from day one.
The final verdict is that franchises and independent restaurants have upsides and downsides. If an investor wants more control over their business and is driven to create every part of their brand identity, then an independent restaurant may be a good fit.
However, if someone is inexperienced in the hospitality business or is looking for a tried-and-true manual for restaurant success, they may fit better with a franchise. No matter which option works best, research, planning, and financial expertise can make or break an investment.
Going into the hospitality business can be a challenge. When opening a restaurant, many entrepreneurs need help figuring out where to begin. This indecision can come to a head when deciding if opening a franchise or an independent restaurant is the better option. Each option has its benefits and downsides, requiring dedication, patience, and entrepreneurial know-how.