The Difference Between Owning A Franchise Vs. A Start-up
Updated: Feb 24, 2020
You've made the decision to be your own boss, now what? Do you start a business from scratch, buy an existing business or buy a franchise? You’ll pay an initial franchise fee and ongoing royalties, but your franchisor should cover the cost of business expenses such as training, customer support, essential resources, and much more, oftentimes making it a cheaper option in the long run. Here are some reasons to consider buying a franchise:
1. Name recognition - A franchises name will carry goodwill at a consumer level and you as an owner can benefit from that. The franchise has spent years and often decades building a recognizable name. Strong name recognition means that a concept has already established a solid foundation among consumers. Most people prefer brands that they trust. Concepts that become franchise chains are able to achieve a heightened level of brand recognition at a much faster rate. Franchises have the ability to build on the momentum that comes with expansion and appear on billboards, radio shows, social media, and TV. That exposure is ultimately what drives a brand forward. You’ll also experience a faster return on your investment thanks to the brand, support of an experienced team, and established business model.
2. Resell Value – One of the biggest frustrations I experienced when researching small businesses for sale was how bad at bookkeeping most of the owners were. I often saw accounting written in pencil, many items, and income not disclosed and inventory systems that were from 30 years ago. With franchises, they have an established path for owners to follow and sometimes have a built-in CRM/POS, inventory and accounting system to aid in success.
A franchise can command a higher price than an independent business. Franchises come with a proven method, support, and consistency. The existing franchise already has a history and cash flow from day one. They also have a very established demographic from many studies done. You can also speak with other franchisees in the system. If you conduct your research discreetly, they will provide you with insight into the specific business and the franchisor that you may never be able to determine on your own. Which would you rather own?
2. Risk - Depending on how comfortable you are with risk, franchises tend to be the safer risk. For risk-averse entrepreneurs, franchise can be the safer bet for return on investment due to established support systems and a proven business model.
3. Cost-Benefit – I hear all the time that franchises are more expensive, but is it? Many startup business owners don’t have the capital to do research that gets results. They have an idea and fumble along until they make it, often making costly mistakes. Franchises can be less expensive to open. Franchises have been through the pain and cost of a startup, they know what works and what doesn't. They can also help with:
Overbuying/ underbuying inventory- Most businesses don’t have a clue how to control these costs and can come up short or overbuy something that isn’t going to sell. A franchise can help the owner dial in how much and when they should be purchasing items. In fast food, they can know what is trending (restaurant trends are fickle) so they can adjust menu items to the times.
What kind of equipment to buy or lease, insurance, bonding, and zoning - You finally make the leap to buy that restaurant of your dreams and find out you need a hood. A hood changes your insurance prices, an expensive mistake that wasn’t researched. This can apply to any required licenses, zoning permits, and other costly items. Franchises have been there done that and can help anticipate these items.
You have a price advantage to buying in bulk- Many franchises have partnerships with groups to help you keep your prices down, remember you have more buying power as a group than as an individual. The margins in your product can make or break any business that has the ability to buy as a group can widen that margin.
Marketing, what does and doesn't work – This is the one thing businesses never account for in their first year. I’ve seen new owners open a shop and think that was enough, and struggle to drive people to their business, assuming the general public knows what is going on in their shop or that it is there at all. Many franchises have an aggressive marketing plan built into the cost some will even include call centers that do cold calling.
Pre-designed logos, recipes, and ads- Unless you have a background in design, food science or marketing odds are you don’t know how your business demographic will respond to your business. What do they think about when they see your logo, the name of your business, or your food recipe, etc? Humans tend to move towards being validated in what they are doing, so we can avoid criticism of our product. Long story short, just because your cousins like your egg salad recipe doesn’t mean it’s going to be a hit in Dallas, TX. That goes for your logo too, just because you think your logo is saying something, doesn’t mean it’s being received that way. The franchise has spent years and money perfecting this. It’s not by accident we can just look at the “Golden Arches” and know exactly what it is.
Agreements with large vendors- We have franchises that we work with that have agreements with large accounts to get their business. Such as a hotel chain agreeing to use a cleaning franchise service. Once again giving you the advantage as a franchise owner to beat a small business owner when getting the job. The job has already been negotiated at a discounted rate and many times a startup just can’t meet or beat and stay in business.
A handbook to a proven model- Once you have paid your franchise fee, the franchisor will come in with a structured plan to get everything in order for you to get started. From training you, doing a grand opening, to finding a territory that your franchises demographic will be located in. They can also help with finding a location that will bring in traffic & lease negation. Many new owners do not understand how much traffic surveys and traffic changes that are planned in the next few years can impact their profits.
Lending – Sometimes getting a business loan can be easier for a franchise than startup. Having money to fund your project is a big deal. Franchises are proven, have a system and a strong plan, banks are more likely to lend for this instead of a startup with no real direction or proven concept.
Store layout – Stores are a huge overhead for any owner, but what about how the store flows, visual appeal, and efficient design? How product placement impacts buying. What about signage? Ever got lost trying to find a business because they had inadequate signage that wasn’t visible from the road? This is another area that a franchise has spent a lot of time and money to figure out what is most appealing to a consumer.
Support -Go into business with a strong system that is there to help you not only launch but be successful.
Training, initial and ongoing- What you can expect from support in franchises will often consist of initial training (1 to 2 weeks), grand opening and launch as well as weekly assistance while you get established. Some other perks I have seen are a built-in business coach, seminars, and conventions. Being a business owner can be lonely, having others to talk to that own the same business can be very supportive. You can find these networks with a startup but the problems you can run into is they aren’t a related business, or if related they view you as competition and don’t want to support you making it. With a franchise, they can’t do business in your territory and you working as a support system only strengthens the brand.
Marketing support – Like stated above marketing is crucial especially in the first year for any business. Figuring out what works and what doesn’t will be built into the cost of your business. They typically already have a company that manages all the marketing for all the franchises nationally and simply gets you plugged in for your area. They also know what ad sells and what doesn’t for your demographic, therefore saving in advertising.
Operation support- Do you ever get overwhelmed just thinking about the day to day administrative duties. If you’re an entrepreneur, you are a visionary and delegator, the thought of bookkeeping sounds boring or maybe you don’t have the first clue how to get started. Some franchises can go as far as offering these services, HR or payroll, many of the affiliated companies already have done this for other franchisees and have no learning curve to help you.
Financing availability- It’s rare but some franchises offer financing to help you get started if not they will offer a 3rd party lender to work with. Most franchisors do not offer to finance. *Item 10 of the Franchise Disclosure Document will let you know if any is offered. If financing is available, it may not be at the best terms that you may qualify for on your own, so make sure that you do due diligence for yourself.
Not all people are right for franchising, keep in mind as much support that is given is great but in the end, you will need to follow their system, and that isn’t right for everyone. You will also have ongoing fees including royalty fees and marketing. Marketing fees will cover in-depth market research and marking plans. The royalty fees will cover the ongoing use of the brand.
SSB Franchise Consulting offers one-stop shopping when you are searching for a business to call your own. We help you save time by working with you to learn your likes and dislikes and style of doing business then matching you with prospective Franchisors at no cost to you. To read more on if we're a good fit go to https://www.ssbconsulting.us/faq 208.724.1731
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