Benefits of Franchising vs. Starting Your Own Business
Should you start a business from scratch or buy a franchise? What are the pros and cons of a franchise system? Is franchising worth it?
Franchising is based on a relationship between the brand owner and the local operator to skillfully and successfully extend one’s established business system (for a more detailed description of franchising, check out our post: What Is a Franchise Business?)
Franchising can be a great way to increase revenue and diversify your investments, just as it can be a great entry point for a prospective business owner. The business model, support, and high potential for growth make franchising an intriguing investment opportunity for people of all backgrounds.
When you start a business from scratch, scalability can be a daunting task—both in terms of logistics and financials. If growth and expansion of your business are a part of your goals, franchising is the way to go. Franchising requires less innovation, trial and error, and process management as an independent start-up.
The whole franchise model is built on the idea of scalability, and every detail has been perfected. Many franchisees also offer some financial benefits to multi-unit franchise owners, such as a reduced franchise fee.
Multi-unit owners can further save money on staffing by rotating their employees between locations when needed. Advertising costs can also be significantly lower per location if you own multiple units within the same geographic area. You can even start with multiple units, provided you have sufficient capital.
With a strategic growth plan, there is always the option of later selling your franchise for a hefty profit.
“It’s good to keep in mind that in a well-performing franchise system, the exit value of a franchise may be higher than that found in an independent non-franchised business because the relationship with the franchisor’s marks increases the value of the business being sold”-The Balance Small Business
Plan ahead and be prepared—consider exit strategies when purchasing a franchise even if you don’t anticipate selling. Your own personal circumstances could always change later on, and you’ll want to have options.
While financing is not typically provided by franchisors, it may be easier to receive financing in the form of an SBA loan for a franchise with a proven track record rather than for a start-up.
The Financial Disclosure Document, or FDD, is provided by the franchisor a minimum of 14 days prior to the signing of a Franchise Agreement contract. The estimated initial investment of starting the franchise can be found in item 7 of FDD, and the Financial Performance Representation (FPR) is disclosed in Item 19.
You will be able to review all of this information and get in touch with current franchisees prior to making a decision or signing any agreements. For more information on what you can expect to find in the FDD, check out Everything You Need to Know About the FDD.
While it’s important to have a good understanding of the financials provided by the FDD, keep in mind that it is not a guarantee of your financial performance. The success of each individual franchise location is affected by the local market, how the business is operated, how marketing funds are allocated, how customers are treated, and many other factors.
That being said, however, the FDD can give you a better understanding of your earning potential that you wouldn’t get when starting a business from scratch.
Your franchisor likely has tried and true processes that have been proven effective, so it’s usually in your best interest to follow those systems rather than to try and do your own thing.
Risks of Franchising
Owning a franchise and having your own business each come with risks. That’s just part of the game when it comes to business ownership.
The most obvious drawback to franchising is the fees. These typically include an initial franchise fee, ongoing royalty fees, and a marketing fund. For more details on a specific breakdown of fees and royalties, you can consult items 6 and 7 of the Franchise Disclosure Document. You must also renew the franchise agreement after the term expires (the length of the term varies depending on the specific franchise but is typically 10 or 20 years).
Think of these fees as a tradeoff—you may be putting more into the investment, but the resources, brand awareness, buying power, and ongoing support you receive in exchange will very likely create further opportunities for growth and profitability. Keep in mind that, even without franchise fees, an independent start-up can still prove to be more costly.
There are no guarantees in franchising, just as with any form of business ownership. The franchisor cannot guarantee your financial performance. The success of your business comes down to how you choose to operate it and apply the systems and procedures provided by the franchisor.
This being said, however, franchises typically have a higher success rate than independent businesses.
Continuing to invest additional money into your business will only improve your revenue stream, leading to higher and higher ROI. It’s always best to have an accountant to help you with financial management and planning. Have a long-term diversification strategy (investing in a separate retirement account, for example), or ensure your industry is resilient to an economic downturn if you will be “all in.” With the proper preparation and due diligence, franchising can be a smart and rewarding investment for your future.
- Franchises Are Not Passive Investments
- The Pros and Cons of Buying a Franchise
- How to Find a Franchise With Good Return on Investment
- The Franchise Disclosure Document (FDD)
- Here’s a Rundown of the Duties and Definition of a Franchisee
- Negotiating a Franchise Agreement
- Learn the Steps in Buying a Franchise
- Pros and Cons of Buying a Franchise
- Top 25 Investment Strategies for Small Business Owners
- Understanding and Calculating the ROI of a Franchise
- The Simple Guide to Evaluating Franchise Opportunity Economics