The dream of being your own boss and starting a business from scratch is within reach of many entrepreneurs. However, the aspiring business owner faces a critical decision: start from scratch or buy a franchise? This decision depends on many factors and requires careful consideration.
Let’s explore the pros and cons of buying a franchise to help you weigh whether it’s the best path for your entrepreneurial journey.
Advantages of Buying a Franchise
1. Established brand and reputation
After the purchase, the franchisee immediately enters the minds of consumers who are familiar with the brand. This established reputation is priceless and can take years to develop for a startup. Trust is not a market factor, you can just think of it as a new business. A franchisee inherits the goodwill of an established brand, often gaining a significant customer base from day one.
2. Proven business model
Franchisors typically refine their models through rigorous testing. Their standardized processes are the result of learning from both failures and successes, offering franchisees a blueprint for profitability. This pre-screened business model can reduce the uncertainty that plagues new businesses. As the old adage goes, why reinvent the wheel when you can get to your destination faster and safer using one that’s already proven?
3. Support and training
Running a business, big or small, can be complicated. However, franchising provides a comprehensive training program that equips new owners with the knowledge needed to navigate the specific business environment. Ongoing support, including leadership, operations and marketing guidance, is often part of the package. This extensive support structure can be an invaluable resource for those new to the business world or franchising in particular.
4. Marketing and advertising assistance
Marketing is a critical component of business success, but it’s a skill that doesn’t come naturally to every entrepreneur. Franchisors typically offer national or regional advertising campaigns that can massively amplify the local franchise message. This level of branding and marketing support is not available to most small, independent businesses. It accelerates local franchise market presence and growth, often at low cost through collective advertising agreements within the franchise network.
Cons of Buying a Franchise
1. High initial investment
The initial costs of buying a franchise can be significant. These costs include franchise fees, initial setup costs, and often large amounts of working capital. The fee alone can be a deterrent for many potential franchisees, and it’s important to weigh these costs against the potential earnings and benefits, given that revenues may be slower to accrue than in the standalone startup model.
2. Limited creativity and autonomy
For the entrepreneur who thrives on innovation and autonomy, franchising can be a double-edged sword. While a franchise offers a ready-made system, it can also stifle creative freedom. Franchisees are required to operate within strict operating and branding guidelines. Those with a strong sense of independence may find the lack of control over business decision-making to be a significant disadvantage.
3. Royalties and Fees
In exchange for support and use of the franchise brand, franchisees collect ongoing royalties and fees. These costs can range from a percentage of revenue to fixed fees or a combination of both. The consistency and predictability of these costs can help with financial planning, but they also reduce business profitability. It is important to evaluate whether the franchisor’s support justifies the fees and whether it is a mutually beneficial arrangement.
4. Dependence on the success of the franchisor
No matter how well-managed a franchise is, its success depends on the franchisor’s broader activities. A change in corporate strategy, mismanagement or unfavorable advertising can affect the operations and reputation of a local franchise. Lack of control over external factors can be frustrating for franchisees.
Choosing to buy a franchise is a significant turning point in anyone’s career. This is an introduction to a proven system with the promise of support and success. This is a deliberate step. There is also a personal aspect to it. There are additional points to consider:
Your personal goals and preferences
Your decision to buy a franchise or start a new business should be in line with your long-term dreams. If independence or the desire to create something unique motivates you, starting your own business may be more suitable. Conversely, if you prefer the security of a proven system and the support of a larger network, a franchise may be the path to success.
Your financial situation is an important factor in making this decision. Franchising often requires a larger initial investment, but it provides a structured approach to building a business. Assess your own risk tolerance and decide whether the guaranteed support of a franchise is worth the initial financial outlay.
Industry and market analysis
Do thorough research on the industry you are considering. Market saturation, consumer trends, and the competitive landscape play an important role in the viability of your business. Whether you’re starting from scratch or buying a franchise, a deep understanding of the market is out of the question.
Business by its very nature carries risk. However, franchising generally offers a lower degree of risk than starting an independent business. Weigh the risks and benefits of both options. Determine what level of risk you are comfortable with and what you are willing to invest.
The bottom line is that buying a franchise can be an entry point for entrepreneurs, providing structure, support and the power of an established brand. However, this is not a one-size-fits-all solution. Independent startups offer a variety of advantages, including the freedom to innovate and create. When considering buying a franchise, think about your career aspirations, financial situation and risk tolerance. Ultimately, the decision to franchise or start your own business is a very personal one, and it’s important to do your homework and do some soul searching to make the best choice for your future.
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Melissa Houston, CPA, is the author of Cash Confident: An Entrepreneur’s Guide to Creating a Profitable Business. She is the creator of She Means Profit, a podcast and blog. As a Financial Strategist for small business owners, Melissa helps successful business owners increase their profit margins so they keep more money in their pockets and increase their net worth.
The opinions expressed in this article are not intended to be a substitute for any professional or expert accounting and/or tax advice.