Key Points:
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Franchises reduce startup risk by offering a proven business model, built-in support, and established systems and supplier networks, which can make it easier to start and potentially reach profitability faster than building an independent business from scratch.
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Startups offer more creative control and flexibility but require building everything from scratch with higher uncertainty and more experimentation, risk-taking, and personal effort to develop systems that work.
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The right choice depends on your goals, risk tolerance, desire for structure versus independence, and long-term business goals.
Perhaps you’re tired of working for someone else. Maybe you want more work flexibility. Whatever the case, you’ve finally done it. You’ve made the decision to take back control of your career and strike out on your own!
With so many opportunities available, each with its own pros and cons, it can be overwhelming to research and compare business opportunities. Deciding between starting a small business from scratch or buying a franchise is a great place to begin. But it can be a complex decision. Both options offer exciting benefits as well as their own unique challenges. You can decide which option makes the most sense by asking the right questions and performing thorough research.
How to Decide Between a Startup or Buying a Franchise
Start by asking yourself a few questions. Be honest with yourself and give yourself space for ongoing reflection.
1. How do you handle risk?
If you’re thinking about starting a new business, you’re probably comfortable with some risk. However, you should think hard about the amount of risk you’re willing to take on. For more risk-averse entrepreneurs or if you’re simply looking to lessen your exposure to uncertainty, franchises are an appealing option thanks to their established support system and proven business model.
2. Are you a creative, ‘big-picture’ person, or do you prefer to follow a prescribed system already outlined for success?
The beauty of the franchising model is that all the initial, upfront work has been done for you. This includes creating a marketing plan, picking out uniforms, designing logos, deciding on store layout, vetting vendors, and ordering merchandise. With a proven business model in place and all the details established in advance, you can hit the ground running.
However, if it’s important for you to have input on these aspects of a business—if you get excited about creating a marketing plan, picking your own vendors, designing the layout of your store—then starting your own company may be more appealing to you.
3. How do you handle taking direction from other people or organizations?
Owning a franchise gives you freedom and independence. You are your own boss. However, you will have to run your franchise in compliance with predetermined stipulations, including sharing your franchise’s financial information or spending a certain amount of money each month on advertising and marketing.
On the other hand, the best franchise companies share a great deal of financial information with their franchisees in return. This allows them to benchmark their performance with the rest of the franchise system. This can be a huge advantage for franchisees to help improve their financial performance and business profitability. Remember this as you reflect on which business venture is right for you.
See the Top Rated Franchises
Money and Risk: Franchise vs. Starting a Business From Scratch
Starting a new company, whether it’s a franchise or your own startup is going to require significant investment of both time and money. Depending on the type of business you’re looking to start, costs can vary wildly from a few thousand to a few million. Every business startup will have different expenses and capital expenditures. However, there are several expenses that can be expected for any new business, including:
- Advertising and promotion
- Borrowing costs
- Employee expenses
- Equipment and supplies
- Insurance, license, and permit fees
- Research expenses
- Technology expenses
These costs exist for both franchisees and small business owners. But, for franchisees, these costs often come as fees.
Franchise Fees
Most franchisors charge franchisees a monthly or quarterly royalty fee in exchange for permission to use their brand. This fee is typically a percentage of gross sales. There are also marketing and advertising fees that are mandated by many franchisors.
In exchange for a marketing fee, franchisees benefit from in-depth market research and proven marketing plans. These established assets set franchisees up for success from the start, helping them avoid the sometimes grueling and expensive trial-and-error process that independent business owners contend with as they figure out the market and get to know their customer base.
Similarly, costs for materials and supplies are affordable and typically of the highest quality because franchisors have pre-established, deep-rooted relationships with suppliers and can leverage collective buying power.
Unlike franchises, startup businesses don’t have any royalty fees or preordained marketing and advertising costs. But just because you’re running your own business doesn’t mean you won’t face recurrent costs.
The difference between franchises and independent businesses is that, for franchises, these monthly fees are set at the same amount each month. When you own your own independent company, recurrent costs can—and likely will—fluctuate. Not to mention, you’ll be investing a lot of time researching the best ways to market your business, identifying the right technology for your needs, and determining your company’s persona.
When you buy a franchise, all those decisions have been researched and established to ensure your company’s success. When buying a franchise, you buy into a tested and proven system.
Finding an Affordable Franchise
Another major consideration affecting the initial investment for an independent business or franchise is where you’ll be working. Is it out of your home or car, or do you need to rent or buy a space? Infrastructure requirements are a huge factor in the initial cost of a new business or franchise, which is why the more affordable franchise options are concepts that allow you to work out of your home or car.
As such, industries that are typically less expensive to buy into include travel (brand examples include Dream Vacations and Cruise Planners), kids’ coaching (brand examples include Amazing Athletes), residential and corporate cleaning services (brand examples include Two Maids and 360clean) and even wildlife trapping (brand examples include Critter Control)—all of which are astronomically less expensive than big-brand food and retail companies like McDonald’s, 7-Eleven Inc., and Dunkin’ Donuts.
See the Top Low-Cost Franchises
Like starting a business from scratch, franchises can cost anywhere from a few thousand to upwards of $5 million. While the initial investment for some franchises can be expensive, there are affordable options to fit any budget. In franchising, every brand is different and has different initial investment costs. All of them are outlined in the brand’s Franchise Disclosure Document (FDD) for your perusal.
Recurrent Costs for Franchises vs. Independent Businesses
Franchise:
- Marketing/Advertising Costs: The franchisor mandates this fee to pay for national and local advertising efforts. Sometimes it’s a percentage of sales while, other times, it’s a set fee.
- Royalties: A monthly fee your franchisor collects in exchange for permission to use their brand. Typically, it’s a percentage of gross sales that ranges from 4% – 12%. In other cases, the royalty is a set fee.
- Materials/Supplies: Costs for materials and supplies will be affordable and high quality, given that franchisors will have established relationships with their suppliers and leverage collective buying power.
Independent Business:
- Marketing/Advertising Costs: You alone are responsible for creating your brand’s identity, rather than relying on an established name. Therefore, advertising efforts for independent businesses will have to be more valiant than those of franchises.
- Materials/Supplies: It takes time to develop a trusting relationship with suppliers and to feel confident you’re getting the best quality product for a reasonable rate. Also keep shipping and delivery rates in mind. These expenditures can add up—and recognize that you won’t benefit from collective buying power like franchisees do.
- Overhead/Operating Expenses: These costs include rent, utility, vehicle leases, office machines, and equipment leases. Consider costs for upkeep, maintenance, and repairs.
- Business Association Fees and Continuing Education: Monthly fees for membership in a professional association and any expenses related to continuing education, such as conferences.
Success Rates for Franchises vs. Startups
In a study conducted by FranNet, 92 percent of franchises were still in business after two years and 85 percent after the first five years. Compare that to independent businesses. Investopedia reports that 25 percent fail within their first year. Fifty percent of the remaining fail within five years, while 30 percent of the remaining stay in business for 10 years.
The bottom line: Franchises have a higher overall success rate than startups. Franchises operate under an established business model that has already brought success, while independent businesses make adjustments and decisions to their business model as they go.
However, not every franchise is a safe bet, and not every independent business is destined to flop, so it’s important to research and compare franchise opportunities.
Individual franchise success rates vary from as low as 40 percent to as high as 100 percent. Be sure to investigate the success rate of any franchise you’re considering and talk to franchise owners.
As for independent businesses, remember that there are countless success stories. Facebook, Apple, and Starbucks are companies with major international clout that once started out as small businesses. Who’s to say that your independent company won’t be the next?
Opportunities and Challenges of Buying a Franchise
No matter if you decide to start a business from scratch or open a franchise, there will be certain things that empower and inspire you and other things that hold you back. Take time to consider and weigh the different opportunities and challenges that both ventures offer. Consider factors such as:
Location
Buying a franchise allows you the opportunity to decide whether you want to purchase a fully operational location or start your own at a new location. Different opportunities are available in each state—Texas, California, New York, and Illinois, for example, have ample franchising opportunities spanning nearly every industry. Keep in mind, however, that franchises may have availability restrictions based on how many locations already exist in a geographical area. These restrictions don’t pertain to independent businesses, of course.
Time to Profitability
Because of the predetermined business plan offered by franchise brands, it’s typically faster for franchisees to begin turning a profit. On top of this, franchises offer a clear exit plan when you’re ready to retire or move on to your next endeavor.
For small businesses, it’s a little more challenging. Making it through your first few years is a major milestone. During these years especially, you’ll have to work long, hard hours to help your business take off, relying on a process of trial-and-error to figure out what’s effective for your business and what isn’t. That’s not to say you won’t work hard when you buy a franchise, but the effort to ramp up and gain brand awareness will be significantly less with a franchise versus a startup.
Creativity and Community
Owning a small business offers owners the freedom to innovate and tap into their creative side, a vital part of the success of any small business. Starting a business from scratch works best for people looking for financial and personal freedom who have a solid understanding of how to run a business and are honing a grandiose idea.
Franchising offers greater job security and faster returns, allowing you to embark on an exciting new career venture. However, you likely won’t have the same degree of creativity when it comes to running your business. On the other hand, you’re joining a system full of franchisees that you can lean on for advice and guidance when you run into challenges with your business. When choosing a franchise, don’t overlook the company’s culture, values, and goals, make sure they align with your own.
As you continue to weigh which option is best for you, analyze what you hope to accomplish and reflect on how your lifestyle, goals, and beliefs align with each business model. Read up, talk to your friends and family, make lists, speak with business owners and franchise owners alike, but most importantly, know that this is not a decision to make impulsively. Be true to your instinct and what will be right for you, your goals, and your mindset.
If you ultimately decide that franchising is the right path for you, there are thousands of options across nearly every industry. Just remember that not all franchises are created equal. To help prospective franchisees like you find the best brand, Franchise Business Review performs independent market research on franchisee satisfaction, helping to expose the best franchise opportunities available today. You can view this year’s list of the top-rated franchises (as rated by franchisee satisfaction) here.
