- Fantastic Team
- 6min read
- Published: February 11, 2019
- Views: 212
Buying a Franchise vs. Starting a Business
Maybe, you’ve been long ready to make a new career move by leaving your 9-till-5 job or by scaling up your self-employed business to get it to the next level. But you’ve been having doubts on how to go about it. Startup a new company or explore other less risky business opportunities, such as investing in a franchise?
Well, stop scratching your head, because this post will hopefully help you make an informative decision by comparing the pros and cons of buying a franchise vs. starting a business independently. We’ll look into the costs, the risk factors and the success rate, associated with both ways of becoming an entrepreneur and growing a profitable business.
The aspect of funding your business
Embarking on a new business venture involves planning carefully your costs budget, regardless of whether you intend to set up your own company or pay a fee to a franchisor. There is a significant difference, though, between the two scenarios, in terms of the predictability of your start-up expenses, your solid knowledge of what you’ll get for your money, the accessibility of potential lenders to finance your enterprise, if needs be, etc.
Below, we’ll look into these different financial aspects in more detail.
The cost of buying into a successful franchise model will, of course, vary, depending on what type of business you’re getting into (a service provider, a product distributor), the size of the brand’s operations, as well as the level of your business independence and the responsibilities that come with it (a “regular” franchisee, a master franchisee). Still, with owning a franchise business, one thing is for sure – the initial costs are clear from the start. Most likely, you’ll be presented with a few options of entering into a franchise agreement at a set fee, payable to the franchisor upon signing a long-term contract. The document will also stipulate other ongoing costs, such as any royalty fees and other one-off or regular expenses, related to running your business.
In addition, you’ll know exactly what you’re paying for. In other words, the franchisor will clearly state what the initial and royalty fees cover, be it the provision of marketing and sales assistance or their commitment to training you and your staff.
Last but not least, the opportunity to raise the funds (if you don’t have them) to buy a franchise may be somewhat easier than those you have when starting up a business on your own. When it comes to getting a loan, for instance, lenders will be much more inclined to approve your business loan application when you’re about to invest in a proven franchise model. We definitely can’t say the same about trying to sell a bank your own business plan, which may naturally involve a list of uncalculated risks.
And let’s not forget that many franchise owners offer their new franchisees the option to pay their fee in instalments. How handy is that?
Working out the costs for your start-up business and the means to cover them doesn’t need to be a lonely journey but it involves unpredictable risks and very little security when it comes to planning and budgeting. In contrast, some of the various initial investigatory and pre-launch expenses, associated with starting a business from scratch, simply don’t exist when you join a franchise business. Last but not least, the rest of the fixed and variable costs, such as buying equipment, materials and supplies, hiring staff and training them, renting premises, financing your marketing efforts, hiring an accountant, etc., might come at a higher price than if you’ve invested in a franchise. In the latter case, those are in a way “subsidised” and “shared” within the said successful and well-established franchise brand and its network of partners. In contrast, you’re on your own when trying to launch a business independently.
The risk factors
The risk of failure is a natural worry for any aspiring entrepreneur. But this is even more so when you’re starting out your journey without a proven formula. So, let’s see below what aspects minimise the risk of failing at running a franchise business and compare them with the potential drawbacks of building a traditional business with your own means.
Investing in an already established franchise model
We’re not saying that all the thinking will be done for you by the “think-tank” of your reputable franchisor, but it’s fair to say that partnering with a prospering franchise company is a safe way to start and grow your own business. Here’s why:
- A tried and tested business model – Just check how long the company has been on the market. There’s a good reason for its success, right?
- An established client base – Once you join the ranks of franchise partners, you’ll get instant access to existing and new clients from the start.
- Fast ROI – Interrelated exclusively to the company’s buying power and its ability to back its franchisees, you’ll find that with a secure business setup, guaranteed work and/or ready-to-serve clients, the fast return on your investment is in the pipeline from the very start.
- Backing and support – The success of a franchising company lies in the success of its franchisees, too. This means that your risk of business failure is significantly reduced by the franchisor’s commitment to support you in dire times.
- Training and coaching – Franchisors employ dedicated experts to show you the ropes, get your staff familiarised with the brand’s mission and standards, as well as to motivate you and your teams to grow independently, yet, within the larger network of peer franchisees.
Starting up from scratch
From finding an investor or a like-minded partner to marketing your business idea and bringing it to tangible fruition, there are just too many things that can go wrong along the way.
- Overspending your budget – Overestimating your financial power during the pre-launch stage of your venture can easily set you back before you’ve even started officially your business operations.
- Slow return on investment – It basically takes time to get the ball rolling, so prepare yourself to break even for a while as your best achievement before making any profit. Note that very few small businesses are profitable in their first year.
- Competition – Unless you’re launching an innovative tech startup business, expect to have fierce competition, which may not be necessarily operating in your locale. Try competing with numerous online traders or established big brands on your own!
- Making yourself known – The money for advertising will come from your own pocket, which if not very deep, it’s a setback on its own.
- Lack of experience – You might be brilliant at what you do, but often, this is not enough to become a successful business owner. You’ll probably need the expertise of various professionals to get started and those will be at your expense. Furthermore, remember that every business move you need to make will be at your “humble” discretion.
The success rate or how to avoid having sleepless nights
We are not going into figuring out the complexity of statistics, as they are often based on different factors and despite using clear-cut mathematical formulas, can be sometimes subjective. Still, as a general rule, nearly 50% of new small businesses fail to make it in the first 36 months and only about 30% end the financial year at a profit, after 4 years that is. There are also 30% of startups, which keep going for a few years at a continuous loss until the owner has no choice but to pack it all in.
In contrast, your business success as a franchisee is secured by the franchise company’s team efforts to do the “legwork” and develop the brand, which has taken years of improving various processes and practices. Put simply, the company has already been through times of trial and error, so you don’t have to. This means that it is less likely to experience the kind of stress that keeps you awake, tossing and turning, at night if you run your business as a partner of an established company.
The magic of brand recognition
And finally, you can guess that there’s nothing more satisfying than developing your business under a recognisable brand, especially if you believe in its principles and goals. As we’ve mentioned above, the struggle of building your client base is instantly out of the equation when the brand is well-known and trusted. There’s no need for aggressive marketing as the product or service speaks for itself. Or to sum it up, you’ll be riding on the wave of the company’s success the minute you start operating under its instantaneously identifiable logo.
It’s a completely different story to try and get your small business acknowledged and loved, relying on your own means and resources only. This sometimes takes years (if at all).
We hope that our post managed to enlighten you a little about your chances of succeeding in your new business venture as an independent company owner on one hand, and a franchise partner of a popular brand – on the other. In conclusion, we can only share the following tips that might help you decide what is right for you.
- Starting a traditional business from scratch is riskier than investing in a proven franchise business model.
- Always consider the level of your competition before you proceed with the development of your business idea any further.
- If you are a master at your trade but have never owned a business before, stay open-minded and look for no-risk business opportunities.
- No matter which business path you choose, you’ll need to find your own motivation and determination, in order to grow and succeed.
- Last update: August 20, 2019
Posted in Starting a Business
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