I just wanted to drop in and offer everyone some ‘intellectual nourishment’ about starting your first (or second, third, etc.) small or medium-sized business. Should you buy a franchise, or create your own startup from the ground floor? This isn’t an easy question to answer – we’re all human beings after all – with different preferences, lifestyles, hopes and dreams.
Franchises offer you the chance to buy a brand that has already proven it can make money. The corporations that own franchises usually have a pretty strong “modus operandi” in place, and are usually committed to ensuring each branch of their business makes money.
A fresh startup is much different by contrast: You have to bring everything and the kitchen sink to the business with you. If any single aspect fails, or doesn’t go as planned – you could start to drown – and there might not be anyone around to help you back to shore
Startup Costs
Franchise:
This is one of the most telling considerations between starting your own business, or buying into a franchise. Startup costs can be staggering for a new franchise owner and the real profits don’t usually come until you’ve invested in a second, or third store. Check out this link explaining the initial work and startup costs for buying into a McDonalds: Franchise Direct (McDonalds). People say that franchises are for people who don’t know much about business and want to “purchase” a job, but buying one based on that assumption could leave you broke and in a lifetime of debt – do your homework first!
Ownership:
With a business of your own, you could easily start up to 10 small businesses for the fees, rent, training expenses, equipment, additional funds needed, and ongoing fees that a franchise requires – but there’s no guarantee that traffic will find its way to your business and make you money either. If you have one, or a few great ideas with some solid research behind them, then you might be best served to invest money in yourself first.
Brand Recognition
Franchise:
This is a big consideration, but likely already quite obvious to those of you who’re reading this. A franchise is going to be readily recognized by your potential customers: You don’t have to grind it out in the trenches to teach people who you are and what you have to offer them. A good franchise will make sure that you’re in a location that gets people in the door, which puts you face-to-face with potential customers.
Ownership:
This hurdle shouldn’t bother someone who’s looking to start their own business though – like getting newsagencies for sale, etc. Everyone has to start somewhere, just as Ray Kroc did when he purchased a little barbeque restaurant franchise called “McDonalds” from Rick and Maurice McDonald. As Rob Schneider’s character said to Adam Sandler’s character in the movie Waterboy: “You can do it!”
Marketing
Franchise:
A franchise offers the huge marketing benefits that come with a big check book. National – television, radio, Internet, and mailing advertisements will pull customers to your door with very little effort on your part. The main catch is that you and other franchisees are actually paying for all that marketing with the often exorbitant fees that you’re required to pay on every dime of profit you make. For instance, a ‘Subway’ restaurant owner will pay 4.5% of their profit per week to the franchise just in marketing fees: http://www.subway.ca/Own_a_franchise (click on “How much are the royalty and advertising fees”).
Ownership:
As a small business owner, you get to decide how much money goes in and when. This can also be to your detriment too, if you’re undisciplined with saving for a rainy day, or borrowing money when the business needs an infusion.
Fees
Franchise:
Not only is there marketing and royalties to contend with in many franchises: There’s rent on the building (most franchises insist on choosing a location for you and purchasing the property), penalties for not complying with their strict rules, markup fees on food or other product items, and many other unimagined fees that can hammer your credit while you learn the ‘ins and outs’ of becoming profitable with the business.
Ownership:
As a business owner, you pretty much know what’s coming at you – for the most part. There’s still a crap-load of surprises, but they’re typical: rent, wages, marketing, taxes, credit card, line of credit, accountants and other professionals, etc. You have the choice of how much approximate rent you’ll pay, or how much marketing (if any) needs to be done to get customers, and the only business that gets a chunk of your profit will be the government and/or your angel investors.
A Clear Winner?
There’s no clear winner in the ‘franchise vs. ownership’ decision. It’s up to you: your dreams, comfort level, and… KNOWLEDGE. Knowledge is power and a fool is soon parted with his/her money. Many franchises fail due to someone coming into a windfall of money and deciding on a whim to invest all, or most of it into a franchise – or starting their own business with no forethought or research.
Plenty are successful, plenty will fail. Try not to be one of the latter!
Check out entrepreneur.com’s list of top franchises this year: 2013 Top Franchise 500.
Photo credit: (vincent desjardins)
