Buying a Franchise vs. Starting Your Own Business
Many people dream of starting their own business. The freedom entrepreneurship brings is enticing: freedom to build your own brand, to call all the shots in the business, to hit the golf course on a Friday afternoon without any repercussions from a boss, and the list goes on…
Yet what is not talked about as much is the difficulty of starting and running your own business.
As the owner, YOU have to figure EVERYTHING out. This is why some people choose to buy a franchise versus starting their own business.
- Franchises offer a proven business model and brand, which eliminates many mistakes that first-time entrepreneurs make.
- Franchises have to pay a franchise fee as well as ongoing royalties on the revenue generated; however, this is a small price to pay for the advantages franchises offer over starting an independent business.
- The six key advantages of franchises are speed to market, risk mitigation, no experience required, supply chain efficiencies, strength in numbers, and higher exit multiples.
Should You Buy a Franchise or Start Your Own Business?
When you start your own business, you have to handle everything. This includes your company website, name, and color scheme, complicated processes like the supply chain, marketing, hiring, and much more. All of these tasks have to be done by you, or you have to pay someone to do them for you.
When entrepreneurs realize this, they start to see the value of franchises…
6 Key Benefits of Franchises
Yes, franchises require you to pay a franchise fee, as well as ongoing royalties on the revenue you generate. It’s not uncommon to have to pay a $40,000 franchise fee when you purchase the rights to build a location and then pay a 6% royalty fee on the revenue that location generates.
This means if your franchise does $1 million a year in revenue, $60,000 of that will go to the franchisor throughout the year.
But what the Jedi realizes is that when you pick a good franchise, the royalty and franchise fee is a small price to pay for a proven business model and brand.
Here are six key advantages of franchises over starting your own business:
1. Speed to Market
Franchisors give you the playbook for site selection, build-out, marketing, hiring, and more. You don’t have to figure out these details yourself.
The average person that buys a franchise today will likely open FAR quicker than the same person who is starting a business from scratch.
2. Risk Mitigation
If you’re starting a business for the first time, you’re likely going to make mistakes. Mistakes cost time AND money.
A good franchise largely eliminates mistakes for you because the franchisor already made them and has adapted the playbook accordingly.
Additionally, there’s likely some proof of concept for this business via other franchisees who have already opened locations. This is a massive advantage that shows a higher likelihood (though not a 100% guarantee) of success.
The more locations that are opening and operating successfully, the less risk there should be for you!
3. No Experience Required
Top franchises have their marketing and operating systems dialed in, enabling them to turn people from many backgrounds into successful operators.
If your dream is to own a restaurant, but you have a 20-year career in corporate America, your chances of making it in the restaurant industry are far higher going the franchise route.
4. Supply Chain Efficiencies
At scale, many franchises offer cost savings on the inputs to your business. With hundreds of locations open, the franchisor can negotiate lower prices on supplies for the system as a whole.
This means that you should be able to purchase your goods for much less than if you had opened up your own independent business.
5. Strength in Numbers
As the franchise you join opens more locations regionally, nationally, and even internationally, the increased awareness and marketing for the brand will undoubtedly benefit your locations.
A rising tide lifts all boats.
6. Brand Equity → Higher Exit Multiples
Because of the strength in numbers, franchises can create some incredibly strong brands. This is incredibly important to private equity firms that are constantly looking for dependable returns from their investments.
Assuming all else equal, a private equity firm will pay more for 12 Dunkin’ locations than 12 locations of a one-off coffee chain.
Why? Dunkin is an international brand with a huge customer base and a seven- to eight-figure marketing fund. Investing in a small coffee chain competing against that offers potentially more upside but also much more downside risk.
It’s also worth noting that franchising makes expansion easier than entrepreneurship through an acquisition (ETA) roll-up strategy. ETA is becoming a popular option for those looking to escape the rat race.
If you choose to go on your own, it, of course, does not mean that you won’t be successful, it just means it could be more of an uphill battle.
Not only will you have to figure everything out on your own, but you also won’t have much buying power as a sole owner and won’t have any proof of concept for your specific brand. To boot, you’ll likely be competing with other local franchise owners in your industry that could have the backing of a major franchisor!
If you do decide to go with a quality franchise, however, there are clear benefits from start to finish that are well worth the fees you pay.
Too Long; Didn’t Read
When compared to starting your own independent small business, quality franchises allow for the following:
- Less operating risk
- Higher exit multiples
- Quicker opening times
- Supply chain efficiencies
- Less experience required
- Increased brand awareness