Franchising vs Starting a Business from Scratch
Owning a business can be exciting and many individuals dream of owning their own business. While pursuing this dream, however, there are several obstacles that must be overcome. One of the first is deciding the best way to get into a business in the first place. During the startup phase, two of the most popular choices are franchising or starting a business from scratch and without partnering with a franchise brand. A third way, which we will discuss later, is to work with a business intermediary to find an existing business to purchase.
Franchising: There are several reasons an entrepreneur might consider starting a franchise. These include:
- An established and proven business model
- A product or service that has already been tested in other markets
- A recognized brand
- Business plan, training, and support provided by the franchisor
- Established relationships with vendors and suppliers
- Ability to gain exclusive territorial rights to represent the brand
- Easier access to financing
Franchising offers several potential benefits, but it is not without its downside. Here are some drawbacks to this option:
- Expensive franchise fees and other startup costs
- Many franchisees pay a percentage of ongoing sales as a royalty
- Owner has far less control as they must follow franchisor terms and conditions
- Potentially more difficult to sell as may brands require franchisor approval before a sale
- Franchisor could go out of business
Starting a Business from Scratch: Going it alone is not for the faint of heart. Forbes reports that 8 out of 10 business startups fail within their first 18 months. It is not hard to see why this happens. Building a business from the ground up is tough. Expect to put in 12-18 hour days for the first several months, without seeing much financial compensation in return.
If you really love what you are doing and you have fun getting up and pounding the pavement day in and day out, there are great rewards at the end of the long startup tunnel. Once you have established yourself in the marketplace and proven that your business model is successful, it will be an asset you own, one that can provide a good standard of living now, and can be sold later on to finance your retirement.
If your financing options are limited and/or you thrive on creating your own independent entrepreneurial path, then you might be one of the 20% that has what it takes to make it through the treacherous 18-month startup period. Just make sure to go in with the right mindset and determine from the outset that you are going to beat the odds.
The Third Way: Another path that many entrepreneurs choose combines many of the positive elements of franchising, but without some of its drawbacks. This option is buying an existing business. Existing businesses offer several advantages to the buyer, the most important being an established and profitable entity that a buyer can plug right into.
Unlike starting a business from scratch or even franchising a new business, an established business has already been tested and proven successful within the marketplace. Like the other options, there are pitfalls that need to be avoided to ensure you find a business that is a good match for you, and the assistance of a business broker can be invaluable during the buying process. Overall, however, purchasing a business that has already been built can help entrepreneurs bypass the 18-month startup hurdle and put them on the fast track to success.