Choosing between purchasing a franchise and starting your own business is one with promise and peril on both sides that must be considered.
Weighing the pros and cons of purchasing a franchise against starting a non-franchised business begins with some self-reflection. If you are an independent person that likes to experiment or wants to blaze your own trail, a franchise with rigorous systems and proscribed rules is probably not for you. If you want to run a business, but do not know where to begin, a franchise with its own infrastructure established may be the right move for you. Of course, your initial budget is another factor to weigh.
Beyond the above introspection, the pros and cons of franchise business versus non-franchised business in terms of both investment and goals for starting a business must be considered:
- Branding: The reason consumers are guaranteed a consistent product when walking into a fast food franchise regardless of location is because franchises demand uniformity and are often structured to be replicated. These traits allow business owners to have a built-in customer base that is familiar with the products and brands through the franchise’s past years of marketing. On the other hand, non-franchised businesses must create its brand awareness and identity from the ground up.
- Control: Prospective non-franchised small business owners tend to want control over every detail of their burgeoning business. That means developing branding, products, operating systems and intellectual property – and doing so on a trial-and-error basis. When starting a franchise, the prospective franchisee signs an agreement with rules laid out by the franchisor that must be followed. That is because franchisees are awarded a license to use the franchisor’s brand name, system, equipment and intellectual property that is a “business-in-a-box” perfected over many years.
- Competitive Edge: For non-franchised small business owners, all that trial-and-error development costs time and money. For franchisees, your franchisor has refined the business model and operations, which passes savings down to you. Franchises have established hundreds of units in the marketplace, which allow franchisees to open the business faster than non-franchised business owners. Also, vendors may feel more comfortable doing business with McDonald’s than they would with Joe’s Burgers because vendors are more likely to do so as well. This also translates to faster ROI (return on investment) for franchisees, who benefit from the ready-made customer base.
- Start-Up Costs: All new businesses require startup capital for space, equipment and personnel. While starting your own non-franchise business can cost less than buying a franchise, many franchisors have established relationships with lenders that look more favorably upon the brand than an independent business owner with an unproven track record.
- Support: When you start your own business, you must learn all these things on your own, with “rookie mistakes” part of the learning curve. Franchisors provide new franchisees with extensive training in every aspect of their new business, from flipping burgers to which point-of-sale system to buy. And many offer advanced training to help you stay on top of your business as it grows. That is not to say that non-franchised business owners is left alone. Small business owners can join their local Chamber of Commerce or other local business organizations and associations.
- Exit Plan: Starting a non-franchised business has high risk, but also high reward. Selling a successful non-franchised business can be very lucrative, but the pool of potential buyers may be more limited than an known quantity like a franchise business. However, as discussed in our blog about succession rights in a franchise business, franchisors may have a structured system that must be followed in order to groom a potential buyer. However, franchisees should also be able to sell the business back to the franchisor.
*Gene Berardelli may be contacted at: GeneBerardelli@ipglegal.com.
Gene is a New York street-smart attorney with an extreme passion for success. Gene specializes in litigation, arbitration and general corporate law for New York-based and international clients. He, also, is the host of a popular New York talk radio program.
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