Should You Buy a Franchise or Start Your Own Business?
Marc was facing a point in his life when he felt he needed more than just a paycheck. He wanted a job where he could call the shots, but he had two problems: he wasn't sure about what business to pursue or where to begin looking. He determined he wanted to own a business, but couldn't come up with a unique idea and formulating a business plan seemed overwhelming. He finally decided to invest in a coffee store franchise which fit perfectly with his restaurant management background.
For many people the most difficult part of going into business is deciding what the business should be. There are generally three options when considering a business venture: buy a franchise, buy an existing business or begin a business from an original idea. For help in deciding your best course of action, here are the basics you need to know about each.
Buying a Franchise
Buying a franchise business is like buying a pre-fab house all the components are there for you already. The only decision you have to make is which franchise.
Franchises are proven business models that have an established method of marketing a product or service. The franchise concept is used in a variety of industries including restaurants, real estate, cleaning services and more.
The advantages of buying a franchise include:
- Established training and support for franchise owners from franchisor.
- Brand name recognition with proven products and/or methods.
- Greater efficiency with higher expectation of success (in fact, according to the U.S. Department of Commerce less than five percent of franchises have discontinued since 1985, while 35 percent of new businesses close within the first year).
- Often you receive lower inventory prices due to established supplier agreements.
The disadvantages of buying a franchise include:
- The franchisor establishes the rules to which you must adhere.
- Generally there are a variety of additional costs which may include an initial license fee, training costs, promotion charges, and franchise fees (royalties -- which can be as high as 18 percent of sales) all payable to the franchisor.
- When the franchise agreement expires, the franchisor may choose not to renew your lease.
- Start up costs range from a few thousand to hundreds of thousands for bigger name brands.
Make sure to fully investigate and get a clear understanding of terms like "initial cost," "initial fee," and "total cost" along with "cash required," "initial cash required," "investment," "down payment" and "equity investment," as they may mean different things in different offerings.
Buying an Existing Business
Buying an existing business has some of the advantages of buying a franchise, but without some of the headaches of dealing with the franchisor. However, full responsibility now falls squarely on your shoulders without any backup or support.
A few things you should consider before buying an existing business. Do thorough research and due diligence on the business, consider your funding options and the information you will need to obtain, and most important of all, get professional assistance with the negotiation, valuation and purchase process.
The advantages of buying an existing business include:
- The initial groundwork of setting up the business is already done.
- It may be easier to get financing because of a proven track record.
- The market, customers, reputation, and contacts are already established.
- Hopefully the problems have already been worked out.
The disadvantages of buying an existing business include:
- The initial investment is generally very large.
- You need to consider why the current owner is selling.
- You may need to invest more money into the business to ensure success.
- If there are already contracts in place, you may need to honor or renegotiate them.
- The current staff may come with their own baggage.
Starting a New Business
While this route may be the most personally satisfying of all, it is also the toughest. Starting a new business from scratch allows you complete freedom to decide what you want to do and how to do it; however, it also means the responsibility is on you to do everything from the financials to developing marketing and supplier relationships.
The advantages to starting your own business:
- You're not obligated to follow anyone's rules but your own.
- Profit minus start up and expenses = your income.
- The startup costs may be lower especially if you start with a home-based business.
The disadvantages to starting your own business:
- You are responsible for all the work including financials, marketing, supplier relations, hiring support personnel and staff.
- Hours will probably be long while you build name recognition.
- If the business fails, it is probably because of you.
Barbara Poole created Employaid.com after 25 years of working with major corporations to improve company and individual performance. She started her career as a human resources director in a national specialty store chain and continued up through the ranks in senior human resources positions for Fortune 1000 retail companies. She has been quoted in national and trade publications. Barbara is a member of the National Association of Women Business Owners, the Institute of Management Consultants and the Habitat for Humanity Partners Council.