You have achieved an important step in your life, and have decided you want to become a business owner! Now the key question comes up: should you start an independent business or invest in a franchise? This article helps outline the pros and cons of each model.
The pros and cons of owning an independent business
When we think of investing in a business , while we are excited about the possibilities, we also frightened to learn that 8 out of 10 new independent businesses fail within the first 18 months. The causes for the failure can be numerous, for example: lack of knowledge of the target market, lack of differentiation in the market, inability to achieve growth in a sustainable manner, administrative problems, among others.
On the other side, owning an independent business has the advantages of having complete freedom to operate the way you want, no need to pay the typical fees and royalties from a franchise system, and more control over your expenses. At the same time there is significantly more risk about starting an independent business, the upside potential is also higher.
Many people who want to start a business come from little to no experience owning a business. Many have worked for the corporate world for many years, and even though have successful careers, do want to move on into a more flexible lifestyle, more opportunities to bring extra revenues to their homes, leave a legacy to their children, and plan for better retirement. However, as they have never owned a business before, they have concerns about starting something totally independently and fail.
For many, franchising is a better option, as you can still be in business for yourself, but not by yourself! That’s a big different!
The pros and cons of owning a franchise
In general, the chances of a new franchise succeeding are much higher, as a franchise is a business that has been already tested, had its success proven before and is now eager to expand. The American franchising market is blooming! According to the International Franchise Association (IFA) There are more than 770,000 franchise outlets in the US, and together they generate more than 8.5 million jobs and U$ 840 billion in revenues per year! In addition, the franchise contract renewal rate is 95%, which is a strong indicator of the high rate of success of the franchising model!
Companies that decide to franchise their business usually do that as a growth strategy. The owner of the original business believes in the high potential for expansion, but usually does not have the necessary cash to grow, or does not have the bandwidth and regional knowledge needed to manage multiple units scattered in different locations. He then uses the franchising system as a means of establishing partnerships with its franchisees in which he will license the brand, products and business model and provide training and support, in return for a franchise fee, royalties, and some administrative fees. For a business to reach the point of setting up a franchise system, it generally has had great success since its initial opening, more than one unit open and well established, and capital to invest in establishing the franchising system. Generally, these are more mature businesses, which have a solid and profitable product and high market acceptance. Thus, at the time the owner of such a business decides to start a franchise system, he has pioneered the market for its new partners, or franchisees.
The key benefits of investing in a franchise, rather than in an independent business are:
- Be able to run a business that has been proven in the market and is having a successful trajectory;
- Leverage a brand and products or services that have been validated in the market, and are well recognized;
- Be able to fully understand and project all the costs involved with opening and operating the business, from the beginning;
- Receive training and continuous support from the franchisor, who is extremely interested in the success of all the franchised units of his company;
- Count on the larger marketing efforts from the company, which many times helps generate new leads and customers for the franchisee.
The main caveats of joining a franchise are the fact that each franchisee needs to follow a system and certain processes, as compared to the freedom of operating an independent business. The main reason why this happens is because the franchisor needs to ensure there is consistency in the quality and services among all franchised units, and systems and processes are needed for that. That said, many franchisors also recognize that there may be some regional differences between franchised locations, and do allow some flexibility on the way franchisees market and serve their local customers.
Finally, as compared to owning an individual business, most franchises charge royalties, initiation fees and ongoing fees, which obviously do not apply in the case of independent businesses. On the other side, the franchisee is receiving a lot of services from the franchisor (such as training, support, etc) and access to a well-established brand and products.
In conclusion, each system has pros and cons. It is very important to evaluate carefully each investment opportunity, map risks, build a detailed business plans, and perform all the due diligence necessary before making a final investment decision.
For more information about the franchising industry, and assistance with franchise selection, contact us at: email@example.com,
Phone: +1-760-607-6584 / +1-760-607-6585.
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