Business Ownership versus Self-employment
“Every business owner is self-employed, but not every self-employed person is a business owner.”
—Doug Downer
Around 16% of the world’s eligible working population get into business ownership, and they do this for several reasons: it may be to be their own boss, to take control of their life and future, to be proud to be a business owner and, hopefully, to be more financially independent and successful than they would be if remaining in paid employment. It is estimated that business owners generate an income that is 30% higher than had they stayed in employment.
There is a distinction between (1) self-employment and business ownership and (2) entrepreneurship and franchising, and it is important to understand the differences.
Self-Employment and Business Ownership
Both options are good, but there are unique differences that the individual needs to be aware of. Quite simply, the difference is encapsulated in the quote, ‘Every business owner is self-employed, but not every self-employed person is a business owner’.
Every person that goes into business has made a conscious decision to do something for themselves and to create an income stream to sustain their lifestyle. Self-employment relies heavily on the individual to do the work, generate the revenue and control the costs. If the individual takes time off, typically, the revenue stops, and there is no continuity.
The difference with the business owner is the individual is involved in many aspects of the business, but there is a system and resources to ensure the revenue continues if the owner is not there.
Simply put, if you can’t take 10–12 weeks away from your business, you may be classified as self-employed.
There are excellent franchise opportunities for both self-employment and business ownership. Nevertheless, self-employed businesses are slightly harder to sell because they rely on the owner, and there is no guarantee of continuity of revenue, whereas the business is less dependent on the business owner because they have systems and resources to ensure the revenue continues in their absence, and this results in an easier sale and a higher sale multiple when you choose to sell.
The business owner relies on people and needs to lead and manage these people to get results. The self-employed may prefer to work on their own or in a small team without the worry of leading and managing others. It is this evaluation a prospective franchisee needs to make when evaluating which franchise may be right for them.
Having said all of that, the premise of franchising is that the business will work better if the owner is actively involved in the day-to-day operations, so this is required with both options.
A potential franchisee just needs to determine what they want by weighing up the pros and cons of both types of businesses and making sure that It suits their objectives of going Into business.
Entrepreneurship and Franchising
In my opinion, not all business owners or franchisees are entrepreneurs. There’s a distinction between an entrepreneur and a franchise owner that needs to be defined. The description of each is not 100% accurate but indicative when we profile the two types of business owners.
1. Characteristics of a Franchisee
- Straight-A student
- Long tenure with job
- Corporate job
- Drives a family car
- Few speeding/traffic fines
- Married
- Looking for security.
2. Characteristics of an Entrepreneur
- B or C-student
- Moved from job to job
- Owned businesses
- Drives a sports car
- Lots of speeding/traffic fines
- Divorced
- ‘Never saw a rule they didn’t want to break’.
This is not to say that franchisees can’t become entrepreneurs. The fact that they have left the safety of paid employment for self-employment shows that they have an entrepreneurial spirit. Franchising just makes it safer, and many franchisees will remain franchisees of single or multiple franchise units. For those that scale their business enterprises and take on multiple units, they have to have a different skill set and be more entrepreneurial.
I have seen a lot of franchisees ‘cut their teeth’ on franchising and then go on to create their own business. Traditionally, franchisees are not entrepreneurs in the true sense of the word, but franchising helps them to be entrepreneurial.
The Great Resignation
There’s been a lot of talk about the Great Resignation. Originating in the USA, it was coined by Professor Anthony Klotz to signify the change in workplace behaviours of employees in the wake of the pandemic. Continued talk about this has influenced other parts of the world for many of the same reasons experienced in the USA. Discussion on this topic has resulted in people reflecting on what it means to them, and this has driven and perpetuated this notion of the Great Resignation and gotten people to consider a change in their own situation.
The pandemic and change in working conditions with stand downs, lay-offs, reduced hours and terminations caused periods of uncertainty for employees, but many were protected by government support, particularly lower-paid employees. In most countries, government reaction to employee payments had mixed success but, for the most part, protected employees that were unable to work. In Australia, we had a few different support provisions at each stage of the pandemic and subsequent shutdowns of industry. In retail and hospitality (which represent 60% of franchised business opportunities), we had the unique situation where those employees were unable to attend their workplace but were guaranteed a minimum payment, often significantly higher than what they were receiving for the hours they actually worked before the pandemic. So, we had a significant number of people at home being paid to do nothing. This created a shift in people’s mindset around entitlement and a reconsideration of whether they actually wanted to return to work. This coupled with over 600,000 temporary visa holders leaving our shores created a huge shortfall in talent, as many of these visa holders were employed in retail and hospitality. This created a huge shortfall in retail and hospitality businesses and meant many businesses traded fewer hours or owners and family members ended up working more.
For many workers, their employment was made more flexible and those that were not required to be in a fixed location were given the opportunity to work from home and given flexibility, including reduced hours, subsidies from the government, making up the difference in the reduction in hours and with all of this more leisure time at home without a significant impact on lifestyle. People were working less, travelling less and being paid comparably the same, and this caused people to evaluate the way they wanted to work moving forward.
Once the marketplace started to get back to normal with travel restrictions, social distancing and other restrictions put in place throughout the pandemic were lifted, people had gotten used to their new work status. For many, it provided them time to re-evaluate what they really wanted from work and life and the role that work played in their lives.
The workplace has changed, and many businesses have been forced to change with it by offering more flexibility and acknowledging that people have enjoyed working less and working on their terms, and this has created a shift in the balance of power from employers to employees. Those employers that have not adapted have encountered employees leaving their employ either for better work–life balance or for more salary because the market for talent has become more competitive.
In Australia, we haven’t so much seen the Great Resignation; it’s more like the Great Reshuffle. The working landscape has changed, the war for talent is back, and employees hold the dominant position, while employers have to change to keep people.
In periods of low changing employment, franchising tends to do well because when people can’t find work or want to do something different, they look for opportunities in other places, and that’s where business ownership, self-employment and franchising tend to boom. In some cases, people end up ‘buying themselves a job’. This is not a bad thing; it drives the economy, which creates more jobs, and it enables the business owners to work on their terms and in so doing, it mirrors what is happening with the Great Resignation.
Everybody has different expectations of what their working life will look like and what buying into a franchise business means to them. I have spoken with franchisors that both like and dislike the concept of people buying themselves a job through franchising. Some franchisors want a franchisee with more of an ownership mindset than someone simply changing from paid employment to self-employment business ownership. The reality is that when a person invests in a franchise, they have to take on an ownership mindset and approach to the business like an owner otherwise the business will not perform at its optimum. The concern that franchisors have is if someone is satisfied with just taking a wage, they may not optimise the opportunity and have the business reach its potential, which, in turn, drives the franchisors’ revenue through royalty payments.
Whilst the concept of buying yourself a job is a sound one, there is a cost to the franchisee to do this, and it is not sufficient to just get paid a wage as the franchisee has to invest capital in establishing the franchise business. This debt or investment needs to be paid back to the business owner on fair commercial terms. Given that most leases and franchise agreements are for five years the franchisee needs to be getting at least 20% more than their wage just to cover the cost of getting into the business, let alone building equity in the business for all their hard work.
In summary, it’s OK to buy yourself a job, but you need to make sure that the business has the potential to generate a fair return on your capital and time. This is just as important for the franchisor as they want successful franchisees in their network because that makes it easier to find other franchisees.
Now assuming that you do decide to go into business ownership, it’s important to know the difference between paid employment and business ownership, and it comes down to ownership mindset and ownership thinking.
Ownership Thinking
There is a significant difference between an employee mindset and an ownership mindset, and there is nothing wrong with either. It’s a personal choice, and quite frankly, as a business owner, we need employees, as they are the lifeblood of our business. The best business has employees who help the owner achieve their goals by taking on responsibilities that the owner can’t, or doesn’t want to, do.
Business owners make things happen, they take risks and they think long term, hence the need to be strategic, while the employee waits for direction and to be told what to do. If you’re a business owner, your business typically won’t yield a consistent level of income for a few years potentially. But when it does, it will be significantly higher than the income of the majority of employees (with the exception of highly paid senior executives in blue chip firms). In fact, more than 65% of millionaires are business owners.
Employees typically think short term, many are risk adverse and yearn for security. They wait to be paid, whereas the business owners get paid when they want.
The goal of any business owner should be to encourage an ownership mindset among their employees so that the employees work together with the business owner to achieve goals more quickly.
An ownership mindset is where an individual or team takes accountability for the quality and success of both the outputs and outcomes of their work. Both of these are important, as ownership doesn’t mean perfection. It means knowing why you are doing the work (the outcome) and making sure that what you produce (the output) is at the required standard. It means understanding, learning, and challenging rather than following instructions.
The franchisee that takes on a franchise needs to shift their mindset from anything they have done previously (unless, of course, they have been a franchisee before) because they will understand the difference between employment and business ownership to some degree. If you own an independent business, you determine what you do and when; if you’re an employee, your employer has expectations that you need to meet; but if you take on a franchise, you’re somewhere in between. That’s because you have to follow rules and you don’t typically get to set them; simultaneously, you’re running a business which means the buck stops with you, but you don’t have that support system or team of resources that you may have had access to when you were in paid employment. Furthermore, you do have some freedom to come and go as you please, but you also have the financial implications of those decisions and the requirements of the franchisor and landlords to be open at certain times.
Becoming a franchisee is a unique situation, and you need to be prepared for it. Asking other franchisees will give you the best insight into how this may change your perception of business ownership and the reality of being a franchise business owner. Either way, you have to change your mindset and accept total responsibility for your circumstances. Often, franchisees that still have that employee mindset may point the finger at the franchisor when things don’t go to plan. Here’s the thing that you need to know: if a franchisor has invested in becoming a franchised business, they have invested a lot and they have demonstrated proof of concept. If, for whatever reason, it doesn’t work, this really falls back on the franchisee, their due diligence and the way they operate the franchise system.
If you become a franchisee, you must take ownership of the performance and outcomes of your business. The franchisor has given you the tools, so you must put them to work, and the success of your franchise business is 100% on you. If you approach franchising with this mindset, then you have a greater chance of success.
This might sound strange, but I had a very successful franchisee in one of the systems I joined, and he said to me, ‘I understand the success of the business is entirely on me, anything I get from the franchisor after I joined was a bonus’. This is a refreshing way to look at it, after all, the franchisor has worked hard to establish a successful business model and provide franchisees with the opportunity to leverage their brand and IP, but the best franchisors will also work tirelessly to help franchisees be successful. If franchisees aren’t successful, then franchisors can’t be successful, so whilst the business success is 100% on you as the franchisee, the best franchisor is invested in your success and will do whatever it can to support your success.
All too often, I have seen people come out of paid employment and move into franchising but not take ownership for the performance of their business, often blaming the franchisor. It is all about mindset and accountability: if you have done your research and due diligence on the franchisor and the business that you have bought into, the success of the franchise business is on you, you have to take on an owner mindset and accept you are the determining factor in your businesses’ success or failure.
Need help with a franchise opportunity or want to learn more about what is takes to be a successful franchisee? Reach out to the Franchise Ready team at info@franchiseready.com.au or call us directly on +61 289991120.
