Franchise vs. New Business
Starting your own business is both exciting and stressful. The idea of being your own boss can be exhilarating, but it also brings with it stress and uncertainty. Are you confused about what business model is the right one for you?
Do you want to launch your own startup or buy an existing business? Another option could be to choose the franchising model and buy into a known brand name. How do you determine which is the right choice for you?
Factors to Consider While Choosing Between a Franchise and a New Business
To understand whether a franchise is more suitable for you or if you would like to start a new business, you have to understand yourself. Do you want to have the freedom to experiment and innovate, or are you happy following a prescribed system?
Consider the following factors when choosing between a franchise and a new business:
Autonomy
Most people launch their own startups because they want to experience true independence as a business owner. Starting a new business means that the only rules you follow are yours, as you are answerable to no one but yourself. You are in total control of everything, from the smallest detail to the biggest decisions. You are free to work at your own pace, and in all decisions, big or small, the final say is yours.
Starting a new business also means that you will be starting everything from scratch. You will be required to do everything yourself, from creating your business plan to outlining your operations. If you have a great deal of business experience, you may have everything under control. However, if you are not as experienced or it is your first venture, it could be a daunting task.
In the case of a franchise model, everyone operates under a common system. There is already an operations framework in place, and all you have to do is take care of day-to-day operations. However, it also means that you must follow the rules of your franchisor.
As a franchisee, you don’t really own your franchise unit. You sign a franchise agreement with the franchisor, which gives you the license to use the franchisor’s brand name and operating system. Yes, you run the daily operations of your franchise unit and set the values and culture of your workplace. However, when it comes to being the boss, it is the franchisor.
If you want total autonomy in your business, then you are better off starting your own business.
Brand Name
Building brand awareness and a strong reputation can take years. You will have to invest a great deal of time, money, and effort to transform your business into a well-known reputed brand.
However, the advantage of the franchise model is that people are already aware of who you are. They already know what products and services you offer and the type of service to expect. It is easier to leverage the brand name of your franchisor to grow a loyal customer base, especially if you are new to business ownership.
Support
A new business gives you a lot of freedom, but sometimes you may need help. What do you do when you need help? Who do you turn to?
In a franchise model, you receive ongoing support from your franchisor. You also have the option of consulting other franchisees in the system for a solution. If you have questions, you have an entire team of experts through the franchisor to assist. When you run a franchise, you receive advice and guidance whenever you need it.
Marketing
Marketing and promotions play a huge role in the success of any business. When you start a new business, you will create your own advertising and marketing strategy. Every penny that you spend on marketing and advertisements comes out of your own bottom line.
However, when you are a franchisee, you already have the power of the brand’s national and regional marketing and advertising behind you. Being a part of the franchise model means that there is already a marketing campaign in place. These marketing and promotional campaigns are developed by experts who know the industry and your target customers. The franchisor keeps developing new campaigns to keep the marketing fresh and appealing. You can benefit from these campaigns and expand your customer base.
Training
Running your own business means that you have to wear many hats at once. You not only need to manage the day-to-day operations but also hire and train employees. You also have to handle the marketing and the accounting. Most business owners learn all of these on their own, but they also make rookie mistakes. Moreover, what do you do if you do not have the time or budget to invest in training activities? Your employees are the face of your business, and well-trained employees are efficient and motivated.
Your franchisor provides ongoing training and support in a franchise system to help make your franchise unit successful. You receive extensive training on all aspects of your business, from products to sales. Many franchisors also provide advanced training to help you stay on top of your business as it grows.
Financing
Starting a new business can be less expensive than buying a franchise. History is proof that several successful businesses were started on a small budget. Nevertheless, new businesses need startup capital, especially those that require retail space and equipment.
A franchisor may not provide financing, but you can leverage their relationship with lenders. If your franchisor gives you a referral, these lenders will look at you more favorably than a new business owner who has just launched his venture.
If you are unsure about whether you should buy a franchise or start your own business, consider the above factors before you make a decision. It would be best if you also weighed the merits and demerits of both business models to understand which one is better suited for you.
Advantages and Disadvantages of a Franchise
Franchises are extremely popular as they allow you to buy into an established, successful business. Some of the most successful franchises have impressive track records and a low failure rate.
If you are contemplating buying a franchise, knowing the advantages and disadvantages can help you decide if it is the right choice for you.
Advantages
The advantages of the franchise business model include:
Brand Recognition
Branding is essential because it makes a memorable impression on your customers. It also allows consumers to know what they can expect from your business. Branding distinguishes you from your competitors and clarifies what you have to offer and why you are a better choice. To open a franchise means to buy into a brand that is already established and people are familiar with.
Lower Risks of Failure
The fear of failure is one of the biggest reasons that aspiring entrepreneurs hesitate to enter the market. There is a significant difference in the failure rates of entering a known market and a new market. The failure rate in a franchise model is substantially lower than that in a new business.
Easy Setup
A challenge that most entrepreneurs face when entering the market is the setup. Franchising eliminates this challenge because franchisors often provide an easy, ready-made setup for franchisees. The franchisee gets the business format from the franchisor, including the marketing plan and strategy, operating standards, and quality control. The franchisor-franchisee model also offers continuous two-way communication that is very helpful for new franchise owners.
Ready Customer Base
Any entrepreneur who has launched their own venture would vouch for the fact that building a loyal customer pool takes a lot of time and effort. You have to make considerable investments in marketing and promotion activities to raise awareness for your brand. However, when you buy a franchise, you inherit its customer base along with the revenue it generates. These customers are loyal to the brand, and they are usually not bothered by who the owner of the franchise unit is. Loyal customers are a valuable treasure for any business.
Financial Assistance
Since franchises tend to have a low failure rate, banks and other financial institutions favor potential franchise owners. Low risk makes securing funding easier for a franchise. Banks would generally prefer to finance an established and well-known business model than invest in a new business.
Disadvantages
Like any business model, even the franchise system has its ups and downs. Here are some of the drawbacks of buying a franchise:
High Cost
Compared to a new business, buying a franchise can be costlier. You have to factor in costs such as start-up expenses, rent, utilities, employees, franchising fees, and taxes. Some of these are initial costs, while others may be ongoing expenses. The initial cost refers to the franchise fee, which is non-refundable. Upon joining, franchisees pay franchisors a one-time fee and subsequently also pay a percentage of their total sales as a royalty. Ongoing expenses include rent, advertising fees, employees, equipment maintenance, inventory, insurance, and a percentage of the total sales to the franchisor.
No Control
A franchisee has to follow the business framework of the franchisor and has no control over the way the business is run. When you buy a franchise, you have to follow the established rules of the business, which are outlined in the franchise agreement. The brand sets the way the business operates, and a new franchisee can’t operate outside these borders.
Tied to Suppliers
When you are operating a business, your priority is to try and keep the costs down. However, being a franchisee means that you are required to use the franchise supply network. Even if you want to minimize the overheads by finding the cheapest suppliers, you can’t do so. The obvious disadvantage here is not just a lack of control but also a reduction in potential profits.
Advantages and Disadvantages of a Startup
Starting your own business can be an exciting prospect, but it can also be filled with uncertainties and risks. Understanding the advantages and disadvantages of a startup can help you assess if it is the right business model for you.
Advantages
Independence
A startup allows you to be your own boss. You have total freedom to make all your business decisions and establish rules as you see fit.
Financial Rewards
Without a doubt, starting a new business is a high financial risk. Nevertheless, running your own venture gives you the chance to make more money. Being a business owner increases your earning potential compared to being an employee with a fixed income. A startup allows you to benefit from your hard work.
Creative Freedom
When you launch your own startup, you get to work in a field that you enjoy and are passionate about. Unlike a franchise, there are no set rules, and so you get the creative freedom to do something for yourself without the boundaries. Starting your own business allows you to put your knowledge and skills to use and gain personal satisfaction from implementing innovative ideas. You also work directly with customers and reap the benefits of your business’s success.
Learning Opportunities
Being a new business owner means that you need to be involved in all aspects of your business. From operations to recruitment, from training to accounting, you will be the one to look after every aspect of your business, sometimes on your own. Running your own business gives you several opportunities to gain a thorough understanding of various business functions.
Lifestyle
Owning your own business gives you a certain lifestyle advantage. Since you are in charge and set the rules, you can also decide the hours you wish to work. If you have a personal commitment, you don’t need to take anyone’s permission for time off. You can also decide to work from home anytime you like without asking permission.
Disadvantages
Running a startup is not without its risks. Here are a few disadvantages that you may face when starting a new business:
Financial Risk
A substantial amount of investment is required to start and grow your business. For some people, it may even mean dipping into their savings or going into debt. If things go south, it could also mean severe financial loss. Also, there is no guaranteed income when running a startup. There could also be insufficient cash flow during the first few years of running your own business.
Time Commitment
When you launch your own startup, the expectation is that you get more time for yourself and your family. Unfortunately, that may not be true all the time. Running a business can be pretty time-consuming. Although you have the freedom to take time off, it may sometimes even be difficult to take the weekends off. Sometimes, starting your own business may mean that you get even lesser free time than you would have working for someone else.
Unpleasant Tasks
Operating a startup means that you are responsible for all aspects of the business. You will oversee just about everything in the business, including activities you may not enjoy. You may also be required to perform some unpleasant tasks like firing someone to ensure the proper functioning of the business.
Stress
Running a startup can be immensely stressful. There will be several things that you may need to worry about. These include employees, bills, equipment breakdowns, customer complaints, and competition. As the owner, you are also responsible for the well-being of your staff. Taking care of all these tasks can be very stressful.