Going into business for yourself is an important life decision. The decision to start a business on your own business or join a franchise is one you should consider carefully. Each path has its promises, as well as perils.In this post, we explain some of the factors you should weigh as you make your decision.
The Pros and Cons of Franchising vs. Self-Starters
The franchise business model is an authorization given to a franchisee by a larger company to sell certain branded products or services. This model offers quick start-up and support because of the existing structure and strength of the parent company. Read on for more pros and some cons to consider.
1) A good model for first-time business owners.
For first-time owners, the idea of joining a successful and known franchise gives them confidence that the operation will have a better chance of short-term success and long-term longevity. For some, buying an existing business might not provide enough stability and starting from scratch seems a bit intimidating. With a franchise, you can learn the business from others already in it.
2) Proven system.
Franchisees get a proven system of operation. You enjoy a system’s daily operations that are already perfected by franchisor through trial and error and prior investments.
3) Corporate support & training.
You receive management and technical training in how to run the business and use the systems needed for it. You’ll develop a relationship with the franchisors and be offered ongoing support to build your business.
4) Known brand.
The franchise is already an established brand, often bringing with it a built-in customer base. There are also increased security measures taken for your enterprise as well as advertising and brand recognition benefits already in place.
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5) Established business.
Franchisees gain from strength in numbers. You’ll gain from economies of scale in supplies, buying materials, and services, such as advertising, as well as in negotiating for lease terms and locations.
6) High success rate for committed investors.
Mostly, a franchisor will conduct market research prior to selling a new product, so you’ll find there’s demand for the products or services. This leads to a high rate of success for new products and offerings.
In addition, franchise brokerage FranNet found that of franchisees who joined their business between 2006 – 2010, 85% were still in operation after five years.
1) Start-up fees.
Buying a brand name franchise can sometimes require a large initial investment and mostly may require the franchisee to research funding options for the start-up fees needed. Large national franchises may beyond financial capacity of some potential business owners.
2) Ongoing royalty/maintenance fees.
Depending on the arrangement with the parent company, usually some percentage of your monthly gross income will go to the franchisees in return for support in advertising, training and operations.
3) Franchisor’s basic plan & rules apply.
Franchising may not appeal to people who are extremely creative or entrepreneurial, since it’s necessary to follow the franchisor’s business plan to a certain extent. Franchisors usually like their outlets to feel and look the same way.
4) Limited freedom to change products, services and operations.
There may be limitations on what other kinds of business you can operate or become involved in, as well as limitations on employment in related fields.
A self-starter business may seem attractive because the idea appears to have no limitations on the owner. Full control over the business’s direction is an exciting idea to some. However, building a business from scratch is a monumental undertaking. Read on for some pros and also cons of this option.
1) Autonomy through an independent business.
With a new business, you have the flexibility to determine your work environment, work pace and work hours. It also presents you with the ability to pursue a career founded on your interests. Starting a business also gives a wide level of freedom to build the business as you want it.
2) Control over all aspects of business.
You have room to make all decisions about the business activities on a daily basis. Additionally, you don’t have to disclose your financial information to a franchisor.
1) High competition from larger businesses in your industry.
You should be prepared to encounter a lot of competition from already-established businesses in your industry when you start out on your own. Brand recognition and reputation will take months, even years, to build.
2) Product lines are untested.
Start-up entrepreneurs typically make a lot of mistakes has they try to perfect daily operations through trial and error. This is time that could be spent generating leads and sales with an already-established system.
You’ll have to build your consumer base from scratch, so developing a strong marketing plan to attract leads and customers is a must. This type of plan can require a large investment of time and money, which you’ll need to be ready to make if you’re going with a self-starter business.
4) Typically higher investment costs to start and operate.
If you’re used to working for another company, you’ll need to purchase insurance and other personal benefits that were most likely provided by your former employer. Abandoning those benefits can be costly. Also, many ongoing, but hidden business costs will fall on your shoulders as a self-starter, whereas these costs would be included, or at least outlined, by a franchisor.
5) No brand recognition.
You have to invest a lot of time to generate publicity to raise the awareness of your business.
6) No clear, existing support system.
You’ll have to seek out your own network and negotiate things like locations and lease terms on your own, usually getting less favorable terms.
Weighing Your Decision
The franchise business model offers a proven system for new owners who want to venture into business ownership. You still maintain a level of security and structure that comes from the parent company’s strength. While a self-starter business can be attractive due to the freedom it affords you in most aspects of operations, there is less certainty and support at the onset.
Your decision about the type of business you’ll open deserves time, research and attention. You can read more about a good process for choosing a business model in our related blog post.