How buying a franchise is different from a start-up
History has shown that a struggling economy encourages entrepreneurship, which leads to a significant increase in new start-up businesses. But what if you are a hard-working professional with limited business knowledge and resources? You are motivated and more than willing to do the work, but you need a roadmap to guide your efforts. In that case, franchising may be a good option for you.
In order to decide which alternative (franchise vs. standalone startup) is the wisest choice for you, you need to understand the advantages and challenges of both options.
Advantages of Buying a Franchise:
Higher Chances to Succeed – A franchise is an already established business model. Although experts disagree on the exact figures, statistics have shown in the past that franchises enjoy a higher rate of success when compared to standalone businesses.
Parent Company Support – Parent companies (called the "franchisor") provide extensive support for franchisees. A lot of franchises are turnkey operations: that is, the parent company provides the complete package to start the business (including equipment, supplies and training) and the franchisee executes the plan.
Large-Scale Marketing – Many franchise brands have national presence and recognition. Franchisors require franchisees to contribute into a national "marketing budget" which the parent companies uses to run system-wide advertisements and promotions.
Inventory – Franchises typically enjoy collective buying power advantages that are immensely beneficial in terms of maximizing margins.
Disadvantages of Buying a Franchise:
Authoritative Parent Company – The franchisor may exert substantial authority over how you run your franchise, and in some cases may seem to micro-manage the franchisee.
Unforeseen Costs and Potential Lack of Support – Typical costs, such as franchise fees, royalties, etc. add up to a high potential cost of buying and operating a franchise. Also, while most franchisors provide extensive ongoing support, in some systems the support from the parent company may be limited to just setting up the business. Lack of support and lack of ongoing training could lead to further problems in franchises with more complicated business models.
Complicated Termination Clause – If the franchise is not successful, it is usually a complicated and expensive process to terminate the franchise contract.
Advantages of a Start-up:
Innovation – A start-up is the leading channel to expose innovative ideas and make them a reality. Creativity is a crucial element.
Entrepreneurial – A number of hard working professionals, by starting their own business from scratch, can explore unrestrained management and personal skills and talents. Self-guidance and motivation are the driving factors in the success of a start-up.
Independence and Growth – Starting one's own business is a great way to break the monotony of a 9 to 5 job. It ensures professional freedom with limitless potential.
Disadvantages of a Start-up:
Overwhelming and Strenuous – It can be an extensive and tiresome process to find investors, create business and marketing plans, and above all transform an idea into a reality.
Risky – Starting a business is typically more risky as there is no proven formula.
Lack of Training and Support – There is no management guidance and training available for running a successful business. Also, it can be hard to stay motivated and persistent during difficult times.
Now, after evaluating the pros and cons of franchising versus starting a business, you have to self-evaluate. If you are a person who likes to innovate, has a ton of passion, a high tolerance for risk and yearn for managerial autonomy, developing a start-up may make the most sense for you. However, an entrepreneur should be a motivated self-starter and be prepared to confront numerous hurdles. Inversely, a structured “intrapreneur” with an appetite to grow and prosper under the umbrella of a successful brand name and a proven business model will find the franchising option enticing. Though such individuals generally have a lower risk tolerance, franchise owners should expect to adapt to adverse and unforeseen circumstances related to the franchised brand.
In conclusion, irrespective of your preference and decision to go a certain route in business, be sincere and follow through. Hard work and persistence is sure to yield results!
7 Options for Financing When Buying a Franchise
The primary difference between equity financing and debt financing is that with debt financing, you will have an obligation to pay back the borrowed sum at a stated interest rate, but you will retain control of the business; in equity financing you are giving up a part of the business to an investor or investors in exchange for their financing. The investors may claim some control of the business operations; they will also have some ownership in the assets and potentially will take a share in the earnings. You will not have a set debt obligation to repay as you would with a monthly loan payment to a bank. The investor will be taking a risk as to when and how much of the investment he or she will recoup, as well as whether there will be a return on the investment.
Attending IFE's Online Expo? Here's How to Use This Virtual Event To Keep Your Pipeline Full In 2020
We sat down with Tom Portesy and Sheila Fischer from MFV, the parent company that puts on IFE, to talk about how attendees can get the most out of this online experience.