Owning a business is full of decisions, beginning with whether you should start an independent business or purchase a proven business concept, commonly known as a franchise. There are pros and cons to both approaches. Both will require a commitment of time and money. Both come with risks. So which is right for you?
Knowing how starting a franchise contrasts with creating a business from the ground up can help you figure out which model works best with your personality. To help you decide, here are some of the benefits and risks of buying into a franchise.
Franchise Factors That Reduce Your Risk As a Business Owner
- You are buying a proven, tested system. If you are starting a business from scratch, you will be reinventing the wheel. You will be consulting with others to get advice as to what has worked for them and not worked for them. You will be refining your processes, so they are the most consistent and profitable possible. This can take years. Contrast this with buying a franchise. A franchise will have likely been around for years and will have an established history of growth and profitability. The franchisor will give you the systems and strategies that make the business successful. This is a significant head start compared to figuring out everything on your own.
- You will have realistic expectations. If you are wondering what your financial outlook will be, your franchisor should be able to tell you how other franchises initially performed. You should also be able to find out the average time businesses stay open.
- Brand recognition before you open your doors. Most franchises are existing brands that many people already know. So even though your business is technically brand new, the product and services you offer have well-established reputations. You won’t need to convince people of your value or your differentiators. You will just need to get the word out that your business is open.
- Many franchises help with business funding. When you are starting an independent business and decide you would like funding, you will need to approach investors and banks on your own. Conversely, many franchise systems help you get financing, either through their in-house resources or through partnerships with lenders.
- You get support from your franchisor. Your franchisor profits most when you have a successful franchise. Your franchisor has likely had successful franchisees and ones that have failed. Because of these considerations, you will probably get support in every way imaginable, from helping you identify a location to lease, assistance with construction and real estate services, to training and ongoing support to help your business be a success.
Franchise Factors That Increase Your Risk As a Business Owner
- You won’t necessarily get to do it your way. The proven, successful systems that you will be given as a franchisee will likely be required. Franchisors need to protect their brand. This means consistent experiences from location to location. Each franchise uses the same systems to ensure uniformity for its customers. If you are getting into business to do things your way, consider this carefully before buying into a system that you didn’t create and can’t modify.
- You are someone else’s brand, for better or for worse. You will get the benefit of being a known brand, but if that brand suddenly gets bad press, your business will be associated with the bad press. This means that if one franchise gets in the news for something negative, your profits can be affected. You will want to consider the brand you buy into carefully; make sure it is one you are willing to stand by no matter what. Research the brand’s history in the media. Observe how the other locations interact on social media with their local audience. Pay close attention to their reviews on Google and Yelp; how do the franchisees handle negative and positive comments? Do homework in this department; it will literally pay off to find a brand that has demonstrated excellent franchise reputation management.
- You will have to have funds to get started. When you start an independent business concept, you might need funding to move your business along, but you might not. With a franchise, you have to buy into the business before you get to profit from it. If risking money upfront will cause you to lose sleep at night, purchasing a franchise might not be right for you.
- You will continue to pay the franchisor after your initial investment. You will pay an ongoing monthly or quarterly fee to your franchisor. This is called a royalty fee, and it is calculated based on your gross sales. You might also pay an ongoing advertising fee, which covers corporate advertising expenditures.
It is important to remember that the benefits of buying a franchise are all dependent on the franchisor being successful. Not all franchisors are equal. Branded franchise concepts can be great business opportunities or can be catastrophic business failures in which you have invested your time, passion, energy, and capital.
Other Articles & Resources on Franchises
- Is a Franchise Right for You?
- Do Your Homework Before Buying That Franchise
- You May Need a Franchise Financial Forecast If…
- Consider These Criteria before Buying a Franchise
- Want an E-2 Visa? Think Franchise
- Franchise or Indie?
- How to Choose, Buy, and Operate a Successful Franchise
- The Top 500 Franchises according to Entrepreneur.com
- We offer a specialized business plan service for franchises