If you have the itch to begin a new business, you need to decide what type of business is best for you. In the briefest of terms, the simplest choices are beginning a start-up or investing in a franchise with a major chain. To help you figure out if franchising vs. starting a business is right for you, here’s a quick breakdown. Armed with this information, you should have a better idea of which works for you before pursuing new business start-up funding.
All new ventures come with a certain level of financial risk. It’s a fact of life that many new businesses don’t survive their first year owing to economic issues, a lack of experience, or other financial factors. Comparatively, however, franchises carry less risk than start-ups for new and experienced business owners. According to a 2018 study from the Journal of Economics & Management Strategy, franchises are 8 percent more likely to still be in business than independent companies after the first two years. Franchises achieve this result because of the following benefits and situations:
- Franchises are connected to familiar brands with pre-existing target audiences.
- Brand owners want you to succeed and ensure the success of their brand and can provide support as you get started.
- Franchises have experienced every possible challenge, and they can provide tools, training, and knowledge to keep your business going strong.
- Overall, while success still depends on you and your actions, brand owners largely have your back, whereas you’re on your own with a start-up.
Weighing the Costs
Whether you choose to invest in a start-up or franchise, there’s no escaping the beginning costs, which are about even for both opportunities. A franchise usually involves the purchase of all the tools, training, and equipment you’ll need to start and run the business. Otherwise, with a start-up, you’re on your own in purchasing the following necessities:
- Product development and production
- Building purchase or rental
- Hiring and paying employees
- Purchasing equipment
- Company liability insurance
As mentioned above, with a franchise, the brand owner may cover the costs of many of these items and activities. However, a significant cost with franchises that start-ups don’t have involves paying for licensing fees in order to operate under the parent company’s good name. Don’t underestimate the benefit of having that immediate connection with potential customers, however. It will reduce later costs in advertising and building a client base and goodwill.
Even if you make it through your first year, whether with the help of a franchise or on your own, you’re not guaranteed to turn a profit. In fact, you might need to keep investing and re-investing in your business to stay afloat. As pointed out, you must continuously invest in the following to stay solvent:
- Advertising and marketing
- Restocking supplies and maintaining equipment
- Wages and benefits for employees
- Rent and mortgages
- Training and education
Brand holders, of course, look after these matters for their franchises, but franchisees also need to maintain profitability and pay royalties to retain their licenses. Similarly, start-ups are on their own and need to pay not only the above things but also overhead and operation expenses. They’re on their own in regard to finding and figuring out how to implement new trends, necessary equipment, employee training, and more. With independence comes more responsibilities.
Setting a Profitability Schedule
Turning a profit is an ongoing and challenging goal. With a start-up, you need to establish your business plan long before opening your doors. Research your location and target audience and adjust your practices and products to best address their needs. Also, plan to run for a while with no profit, for safety’s sake. Franchises, once again, come with “pre-installed” business plans and are designed to generate profits sooner. Even so, the market is capricious, and you should ensure you have a safety buffer of savings and alternate plans in place. Know about and use new business start-up funding options like 401(k) rollover plans and other retirement fund reinvestment opportunities.
Location, Location, Location
Finding a place to do business is another challenge. As a start-up, you’ll need to educate yourself on zoning laws, proximity to and use of local utilities, and other physical and legal requirements. In addition, at least for physical stores, the location’s accessibility to customers is also a huge factor. With franchises, there’s also the issue of not placing too many stores in the same area to avoid competition within the brand. Of course, many start-ups and franchises exist and do business virtually, which frees you from worries about location, though you may still have to consider product storage and whether local ordinances permit you to operate a business out of your home.
How Free Are You?
When considering franchising or starting a business and which is right for you, franchises seem rife with benefits to the untrained observer. But while there’s an element of uncertainty with start-ups, don’t discount the amount of freedom they can offer you. While a franchise business is indeed your responsibility, in a way, it’s never truly your business. They’re called parent companies for a reason, and like with a parent, what they say about your business is what will happen.
If you prefer to have the first and final say in how you approach your business, however, a start-up is probably preferable—though success or failure all falls on your shoulders. With start-ups, there’s a lot of self-education and on-the-fly thinking involved. As a new business owner with little experience, you could view a franchise as a good way to learn while you earn, with an experienced hand guiding your way. For those with more experience, confidence in their business skills, and a more independent streak, staking out your territory and building a start-up might be the wiser choice.
Before you get too far with your business plans, assess which type of business—whether it’s a start-up or a franchise—is more suitable not only for your profitability but also for your personality!