What’s Better For You: Buying a Franchise or Starting a Business from Scratch?
One of the biggest decisions an entrepreneur will make when starting up a business is whether to buy a franchise or to start an operation from scratch.
Franchises and independent businesses share many similarities, including what is often the key characteristic of entrepreneurs: the ability to be your own boss.
However, there are critical differences between the two that the entrepreneur must carefully consider in order to make the right choice for a successful endeavor.
What is vitally important to understand about these differences is that they can be viewed as either positives or negatives by entrepreneurs based on their personality, tolerances, lifestyle, and more.
One of the biggest distinguishers is the level of control entrepreneurs have when starting a franchise or an independent business from scratch.
Franchisees have much less control over their businesses than an independent enterprise as they will have to follow all of the franchisor’s standards and regulations. The franchisee answers to the franchisor but enjoys the structure provided from above.
Startups, on the other hand, enjoy complete autonomy in every aspect of their operations and have the freedom to offer the products they want, at the prices they want, during the hours they want. These entrepreneurs are held accountable only by themselves and are not provided any sort of roadmap for their operations as the franchisee is.
What the franchisee and startup entrepreneur has access to is another huge separating characteristic between the two forms of business.
Franchisees benefit from having access to know-how as well as key elements provided by the franchisor including the brand name, customers, business model, marketing materials, supply chain, equipment, and more. Of course, this access can work against the franchisee if something negative affects the franchisor, such as a scandal.
Independent businesses don’t enjoy the benefits of access to the franchise structure and thus have to develop their model from scratch. This necessarily creates more start-up work, but also gives the startup entrepreneur the freedom to create their brand, logo, messaging, advertising, and so on.
Both franchises and startup businesses require an investment of money, though these costs vary across industry and other factors. Some significant recurring costs are tied to employees, equipment and supplies, advertising, insurance, and more, while entrepreneurs also must consider startup costs.
Franchisees are typically charged fees and/or royalties by franchisors to cover some or all of these areas, which may be tied directly to profits. Thus, while the franchisee benefits from the franchisor’s assets, there is a premium price to be paid for that access. Also, their additional investment costs will be outlined by the franchisor.
Independent businesses don’t have to pay those fees or royalties, but they also don’t benefit from the prime resources a franchisor offers. Still, the startup owner will be responsible for these regular expenses which may fluctuate throughout the year. Additionally, the initial investment for startup businesses is not predetermined as it is for franchises.
Risk is another very important element for new businesses with stark differences between franchises and startups.
Franchises are generally considered safer bets to succeed given that they follow a business model that has already proven successful and benefit from all of the franchisor’s resources. Nearly 85 percent of franchises are still in business according to a study by FranNet1, though success rates do vary across franchises.
Independent startups are typically more risky investments than franchising, in no small part due to the lack of a support structure provided to franchises. A study from Investopedia reported that half of all independent businesses fail within their first five years.2
The opportunity to develop and run a successful and profitable business with large financial rewards exists for both franchisees and independent business owners. However, differences exist between the two in terms of what that may look like.
For franchisees, no matter how successful their company is, will always answer back to the franchisor, and the franchisor will always continue to receive a cut of the franchisee’s profits through fees and/or royalties.
The independent business owner sees no such cap, as he or she does not have to answer to, or owe anything to, anyone else by him or herself. This entrepreneur may one day become a franchisor, if he or she is successful enough, and chooses to do so.
Entrepreneurs chose to buy a franchise and start their own businesses largely because that is what they do. They want to be their own bosses. However, which route they choose to go into business is based on their interests, personality, lifestyle, and more. The only correct choice between the two is the one that works best for each entrepreneur.
Are you wondering if you should purchase a franchise or start a business from scratch? Do you need help in identifying a business aligned with your immigration goals? Contact Visa Business Plans to discuss your situation and help decide which route is best for you.
Visa Business Plans is led by Marco Scanu, a certified coach from the University of Miami with a globally-based practice coaching Fortune 1000 company executives, entrepreneurs, as well as professionals in 4 different continents. Mr. Scanu advises clients on turnaround strategies and crisis management.
Mr. Scanu received a bachelor’s degree in Business Administration (Cum Laude) from the University of Florida and an MBA in Management from Bocconi University in Milan, Italy. Mr. Scanu was also a Visiting Scholar at Michigan State University under the prestigious H. Humphrey Fellowship (Fulbright program) with a focus on Entrepreneurship, Venture Capital, and high-growth enterprises.
At present, Mr. Scanu is the managing partner and CEO at Visa Business Plans, a Miami-based boutique consulting firm providing attorneys and investors with business planning services in the areas of U.S. and Canadian immigration, SBA loans, and others.