Franchise or Startup: Where Does the Money Lie?

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When you want to start your own business, it can be difficult to know where to start. The first thing is to have that big idea that you feel passionate about and are willing to work hard to make a reality. Without that initial drive and desire, nothing will happen, but it’s important to know that it will only take you so far.

Adopting the right business model will be crucial to your success, and it’s something that many people struggle with early on. Get it right, and you’ll be off to a fantastic start. Get it wrong, and you may end up losing out later on to competitors who are better positioned to capitalise on the way the market moves. What’s more, if you then decide to change business models you could impact your cash flow and restrict your growth during the transition process.

Let’s start by taking a look at how a franchise can help you grow your business.  

The pros of taking on a franchise: Brand Recognition

Franchises are everywhere and are a proven model for large companies to give entrepreneurs access to their brand. They have been shown to have statistically significant success rates as compared to independent startups.

Perhaps one of the main reasons for this is they have already established the all-important brand recognition. Imagine a sandwich shop. No matter how great your sandwiches taste, if you are brand new, you’ll need to do a lot to attract the attention of the passing trade. That isn’t the same for a Subway franchise. Everyone has heard of them, and people know what to expect when walking through the door and parting with his or her money. In the eyes of the consumer, Subway will already have an advantage over you.

If on the other hand, you decide to open a franchise like Subway, you’ll have an advantage from the day you begin. People in your local community may have been waiting for an outlet closer to them and will instantly try your latest offering.

Expect to receive training when you open a franchise

Setting up a business is about more than renting premises and working long hours. It’s about putting the processes and procedures in place that allow the day-to-day operations to run efficiently. When agreeing to open a franchise, it is in the lead company’s interest if you succeed as it will enhance their brand’s reputation.

By providing you with training on hiring staff, marketing, and the overall product line they aim to get you off to a fast start. That is a proven model that has been shown to bring success. Many people find the help with staffing particularly useful. As you’re now a business owner, it’s no longer enough to work all the hours and do everything yourself. You need to delegate, and you need to be able to hire the right people to work with.

The downsides of a franchise: Fees and Restrictions

These are the two main areas that the detractors of the franchise model often mention when they decide to opt out of it. Let’s take a look at each in turn, so you get a better idea of what the issues are.

Franchise fees can be expensive: Make sure you budget accordingly

As with any fair business transaction, there will be something in favour of the buyer, and something in favour of the seller. You’re the person buying the franchise, and you’ll be getting a lot of help and assistance; both with the startup, and the ongoing operations side of things.

The seller is the brand whose name you’ll be operating under. In return for their investment in you and your team, they’ll likely ask you for a significant franchise fee. Typically, this will come in two distinct parts: 

    The Entrance Fee: This is a one-time enrolment fee that is designed to cover all the initial setup costs that come with opening a new franchise. You will need to budget for this in your business plan. Don’t be perturbed if it seems like it’s a hefty fee because you’re getting a lot in return for it.

    The Recurring Fee(s): These are the main issue that some people will have with the franchise model. No matter how hard you work on building your outlet, you have to give an amount to the franchiser. That could be on a monthly or annual basis. Furthermore, it could be a set amount, a percentage of revenue or profits, or some combination of the two.

What you’ll need to do is calculate your first quarter projections to see how these fees will impact your profit margins. That will give you a good idea as to whether a continued monthly or annual outlay is worth what you get in return from the franchiser.   

If you decide that this approach isn’t for you, then there is another option: found a company from scratch.

Founding a startup: The risks you need to consider

The failure rate for independent startups is higher than for franchises. A quarter of all businesses will fail inside 12 months, and only half will still be trading after five years. While this certainly doesn’t mean that it is something you should avoid, you do get more security as part of a franchise.

There are a couple of key reasons for this. Firstly, the franchise allows you to invest your money in an idea that has already been shown to work. Your own, idea, no matter how passionate you are about it, may not be the most profitable. There is then also the added competition you’ll get from established players in your market sector. That means the main thing you need to focus on is differentiating yourself from your competitors so that you offer something unique. However, make sure to do it while also making projections to ascertain whether what you want to do is viable from a business perspective.

The second reason is that you are effectively going it alone. On the other hand, a franchiser will give you everything you need to get set up. As a startup entrepreneur, the onus will be on you to make the smart decisions and put the right people and processes in place. Decide whether this sounds like something you are happy and capable of doing before you decide to become a startup 

Is there too much paperwork involved in founding a startup?

Registering your company may be something that sounds daunting if you’ve never done it. Fortunately, there are sites like 1stformations.co.uk that allow you to get the basics in order nice and quickly. That is an excellent way of building your confidence and showing you that you can get your new business setup all by yourself.

The pros of a startup: Higher risk equals potentially much higher reward

Ask most business owners why they didn’t opt to join a franchise program, and they’ll tell you they didn’t want to work for someone else. As your own boss, you may have more responsibility, but you’ll also have the freedom and flexibility that come with it. That means that you can take the ultimate decisions when it comes to product lines, store layouts, and hiring choices. If this sounds like what you would like out of your career, then you may be well suited as a startup owner.

There is also the potential for a much higher reward. Not only will you get to keep all of your profits at the end of each quarter, but you’ll also be able to be more creative. That means that if you spot a niche, no one is catering for you can be the first to fill it. These types of ventures are inherently less stable than a franchise, but they offer a much higher potential return.

You have the freedom to grow when you run a startup

Some franchisers cap the number of outlets that you can have in a given area. As your own boss, you will be subject to no such restrictions. The only thing that will stand in your way is your ability to attract new customers and increase footfall. As the owner, you’ll be motivated to improve this quarter on quarter and will soon develop the skills that empower your team.

Starting your own business can be a great way to learn new skills and grow your confidence. Both, in terms of, business, and in the broader world in general. There is always the possibility that you will stagnate as part of a franchise system, as a startup you’ll need to innovate continually. That should provide the impetus and the motivation that you need to enjoy your career year after year.

Make sure your choice makes good business sense

No matter what you decide to do, you need to make sure you feel comfortable with it. The best way to do this is to create several projections and forecasts that will predict the likely outcomes. Only by looking at the numbers in detail will you be able to decide which model will work best in your local area.

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