12152017

Startup or Franchise: Which One Is Right for You?

Photo credit: alejandro dans neergaard/Shutterstock

Startup or franchise? Which one is the right choice for you? Here are some of the pros and cons about owning a startup or investing in a franchise.

Being able to work for yourself and not someone else appeals to many people. You may just be starting your career and dreaming of building a business. Or you may have had a long and successful corporate career and are longing for something more – additional money, greater flexibility or the chance to focus on something you love.

Taking a risk and blazing your own trail by becoming an entrepreneur is a popular option shared by many Americans. Nearly 50 percent of the population works for a small business, and the statistics show that the U.S. is home to more than 28.8 million small businesses.

The first step in determining whether starting your own business or investing your time and money into a proven franchise is more your style is to begin with a self-assessment of your strengths, weaknesses, interests, skills and work/life aspirations. Do you work well in a more structured environment, or do you require freedom to create and innovate? Are you risk-averse and like having a support system, or are you more daring and hope to blaze a trail for others to follow one day?

Franchises and startups each pose their own challenges and benefits. Evaluating the pros and cons of each can help you get closer to realizing what the right venture is for you.

Brand awareness

Building a brand is no small feat and can be quite expensive and time-consuming. When you sign on with a popular franchise, the work has been done for you. We all know Subway, ACE Hardware and Pizza Hut, and we’ve become accustomed to a certain set of standards from these businesses. Customers will seek out these establishments for their familiarity and consistency that comes from patronizing these businesses over many years.

Additionally, if you are part of a nationally recognized brand, you automatically have the power of that franchise’s marketing and advertising dollars to support you. This can inevitably result in a faster time to market and quicker ROI.

However, brand awareness comes with a price tag. Buying into one of these better-proven franchises can be expensive and require more startup costs than building your own business.

Site selection

Site selection is critical for many businesses. Most franchisors pre-approve sites for outlets. This may increase the likelihood that your location will attract customers. The franchisor, however, may not approve the site you want. If there’s a specific location where you want your business to be and it doesn’t match the franchise opportunities in that area, then buying a franchise may not be right for you.

In addition, franchisors may impose design or appearance standards to ensure customers receive the same experience in each outlet. If you are passionate about creating a unique look and feel for your business, you may have a hard time following the guidelines set forth by the franchisor.

Training and support services

Perhaps one of the biggest advantages to buying a franchise is the training and ongoing support you receive from a franchisor. They can help with managing the day-to-day business, from hiring and training employees to overseeing the finances. Franchisors can help you learn to run a business rather than doing it on your own, which can lead to mistakes that affect your business’s bottom line – whether through the cost of time, money or both.

Costs, fees and contracts

Depending on the system, startup costs for a franchise can be steep. Many franchise owners find it necessary to secure financing to purchase their business.

In addition, most franchisors require franchisees to pay ongoing royalty and/or advertising fees. Though you benefit from the training, support and marketing these efforts afford, you will always owe a certain percentage of your profits to the franchisor.

Finally, when you buy a franchise, you sign an agreement that locks you in for a specified amount of time, anywhere from five to 20 years. Breaking a franchise agreement can be difficult and costly.

Financing

Starting your own business can cost significantly less than owning a franchise. Many startup owners have gone on to run successful businesses with less upfront capital. But when trying to secure financing, some investment groups may favor those partnering with a well-known franchise over an independent new business owner.

Autonomy

Buying into a franchise system requires you to run your business as dictated by the franchisor with little leeway for business decisions, including the look and feel, purchasing equipment and overall operating procedures. You may control your franchise unit’s culture and who you hire and fire, but you still must follow a prescribed set of guidelines.

To maintain uniformity and ensure future success within a franchise system, franchisors can be very diligent about enforcing policies and procedures. The franchise system they created is their most valuable asset. If following and adhering to a prescribed set of operating instructions to run your business is not something you are envisioning, then franchising may not be the path for you.

Purchasing power

Having brand-name backing allows you to benefit from the collective buying power of the franchise when it comes to purchasing equipment and supplies. This can be critical for finding the right supplier and negotiating deals. Franchisors can also help you with determining what equipment you need, the right size and the supplies you’ll need.

At the same time, a franchisor’s requirement for you to purchase equipment and inventory only from approved suppliers will limit what you can purchase as well as your ability to purchase something at a discounted price from another dealer.

Values and relationships

As a franchisee, you will be signing a long-term contract with your franchisor and creating a relationship through which you will need each other to succeed. It’s critical you do your research and ensure your core values and goals align with those of the franchisor.

If you choose to build your own business, then you won’t be as constrained by the franchisor/franchisee relationship, but you also will not receive the support you may need down the road.

So, startup or franchise? As you can tell the decision is very dependent on the professional and personal experience you want to gain through this next venture. There are merits and perils with each, but at the end of the day, only you can make the right choice for yourself.

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