If you are an aspiring entrepreneur, it is a great time to be alive. We live in a world with probably more business opportunities that have ever existed in history. Anyone considering taking the plunge into entrepreneurship can choose to register and start a company from scratch using a service such as 1st formations ltd, or they can equally choose to plug into an already existing network of businesses in form of a franchise.
In fact, the real problem for starters isn’t usually a dearth of ideas or opportunities available, but rather the most ideal path towards entrepreneurship to pursue. In order to decide what path you would like to follow in the pursuit of your entrepreneurship dream, you will need to fully evaluate the differences between starting a business from scratch, and starting a franchise, in order to ascertain which approach best suits you.
Franchises and independent businesses alike have the same underlying aim: to be profitable while addressing a need in the market. The unique characteristics of each option are key in evaluating which option is suited to your personality and personal goals.
Here are a few pros and cons of starting a franchise versus starting an independent business, to help guide your decision-making.
Pros of starting a franchise
A franchise is usually based on a tested, proven system, which has been replicated at least once. This means that in the path to setting the business up as a franchise, learning opportunities have been condensed, systemized and offered to franchisees. Franchisees will receive training on the key parts of the system necessary to keep the business going – product, HR, marketing etc and this structure will reduce the chances of failure by keeping trial and error to a minimum.
With a franchise comes the automatic brand recognition that relies on the work and business exposure gained by previous franchisees. There is little need to educate the customer on the brand, as customers already have developed a sense of assurance based on their association of your brand with other branches of the same franchise. With this need for brand education eliminated, a franchise is essentially a turnkey business that will start receiving customers from the onset.
As a franchise, you will have access to comprehensive marketing plans which you may have found otherwise difficult to put together in terms of expertise, money and time. This is because most seasoned franchises have already established a demand for their product/services and done the heavy lifting involved in gaining traction and brand recognition.
Most modern franchises already have established complex technical infrastructure already in place to help with key aspects of the business such as online marketing, centralized centers for taking telephone orders, promotional websites, and e-commerce capabilities – all saving the business owner the time and expense involved in getting all of this set up from scratch.
Help and Support
Because of the franchise benefits from your success as a franchise, you will most likely be offered access to an experienced professional to help you develop and grow your business.
Franchise owners can take on the complexities involved in training staff such as taught courses, training material, and web-based support – meaning that the franchise can rely on the franchise to replicate the same kind of training which its other successful franchises have been through.
Economies of scale
As a franchise, your bulk purchasing power offers you access to discounted rates which you may otherwise not have had access to, by running an independent business. You could also benefit from existing contracts with larger organizations as part of a network of businesses.
Cons of starting a franchise
Not only do you need to pay high fees in starting a new franchise, but you will also incur ongoing costs for the use of the brand name.
Limited capacity to change
The franchise model is quite restrictive in terms of how much creative thinking you can apply to the model without being at risk of losing your franchise license. As a franchise, you will have less scope to implement and test your unique ideas than if you were operating independently. Your product offering, as well as your operational model, will be subject to the franchise’s requirements, which you are contractually obliged to.
Conflict of interest
A portion of the revenue generated through franchises usually goes to the franchisors, leaving the franchise to rely on the profit. While there might be an overlap between revenue and profit, both are distinct as some seemingly revenue-generating activities may not lead to increased profit. For example, a franchise which offers a 24-hour service to customers may find that operating costs for implementing this may not be optimal, but the franchise might not be able to avoid this under the contractual agreement
The risk is not completely avoided in operating a franchise. While some franchises might be potential cash cows, many will not operate as well due to a number of risk factors such as location, demographics, staffing, marketing etc
Pros of starting an independent business
If you are the creative type, starting a business is one way to test your creative ideas and share them with your customers. You will also be uninhibited in your ability to express yourself through your work, as well as your ability to make major decisions in your business.
Pursuing your passion
Starting your own independent business is one way of pursuing a venture that you are passionate about, in the unique way that you want to. The satisfaction which comes from pursuing your own dreams can be a powerful motivator and one which cannot be replicated by any out-of-the-box business model. Going independent gives you a chance to make money by doing what you love to do, and there is no shortage of independent business owners who are happy to work longer hours for less financial rewards simply because they are passionate about what they do.
Personal freedom and growth
Starting your own business gives you flexibility over how and when you want to work. Because you are not answerable to anyone, your time is for you to allocate as you please. Unlike a franchise where you may have a cap on how much you can earn, there are no limits to how much you can earn with your own startup because your business growth and personal growth is uninhibited.
Cons of starting an independent business
Higher failure rates
Statistics show that businesses started from scratch tend to fare worse than franchises. This may be as a result of these businesses testing the market while being relatively unknown, as opposed to franchises with a proven customer based and working business model.
In an independent company, it can take years to establish yourself in the public’s mind as a trustworthy, reliable and rewarding service.
When you are starting a business independently, potential lenders have no assurance that your business will succeed, therefore it might be difficult to obtain financing for your business. As a result, most independent business startups are financed through the owners’ personal savings, second mortgages, loans from family and friends, etc as securing financing from the banks is notoriously difficult for small, unknown businesses.
Limited training and support
Most independent businesses find that staff training can take up a significant amount of time and resources, especially as the businesses are new and be evolving quickly.
The initial stage of any new business is a steep learning curve, as you will not have the benefit of access to training from your franchisor. You will be expected to learn on your feet, and also to learn from your mistakes (provided they are not costly ones), and you will need to be prepared to pay for this in blood, sweat, and money.
Perched between your need to earn returns and your immersion into the world of business, you will have very little time spare especially in the early stages of your venture. If you do enjoy relaxing at the weekends or having a chilled night in, perhaps starting an independent business is not for you.
Once you have a good understanding of the relative benefits and liabilities involved in starting an independent business versus starting a franchise, you will be able to ascertain which model is better suited for you.