I have been on both sides of the fence. I have started at least two different businesses from the ground up, and I have owned up to five franchises. I am often asked which is better between the two.
There are definitely pros and cons to both.
Buying a franchise means you are buying into a proven system. It also means you get to be an independent business operator while getting the benefits of a larger network.
Franchising has become a very solid way of starting a business. According to Franchise Inc., over 45% of all retail sales in Canada are generated by franchised businesses.
The same company went on to say, “Of all franchises opened in Canada within the last 5 years, 86% are under the same ownership and 97% are still in business”.
Franchises also have a higher rate of success than a start-up.
Downside to Franchising
Franchising is very systematic, therefore you have to be okay with following the rules, processes, systems, and operations set by someone else.
Some entrepreneurs find this challenging.
2. Royalty Fees
The second reason people are opposed to franchising is the royalty and advertising fees. These fees can range between 6-20 %.
These fees are mandatory, and they are for the lifetime of the business. Furthermore, the better your business performs the more it will cost you in royalty fees.
There is an ongoing sharing of profits with the franchisor.
3. Product Control
The franchisor has control over all the products that you put in your store. They also control which suppliers you can purchase your products from. This can be seen as a negative for some franchisees.
Let’s say you own a burger franchise, and you have a friend that sells hamburger buns cheaper than you buy it from the franchisor approved supplier. You would not be allowed to purchase the buns from your friend.
Starting your Own Business
Starting a business from scratch can be exhilarating for many entrepreneurs! You are in control of every decision in your business, from the colour of the paint in your store to the team you hire.
You feel the freedom of being your own boss.
However there are challenges that comes with starting from scratch…
1. No Name Recognition
With no name recognition, or trust, you will have to spend more time on marketing to get your business known. You will have to work harder to develop the customer trust. This can take time. Patience is required at this phase of your venture.
2. Slower Profitability
In starting your own business it will take you longer to see a profit. Often, there is due to the lack of a smooth-running business operation. As a result, there are more risks involved, therefore, the runway to profitability is slower.
Another reason is, you have to put your own systems in place. From a point of sale system, to uniforms and developing employee manuals. This is because all your resources are put into start-up costs.
3. Low Bargaining Power
As a new business owner, you have no track record with suppliers. Most suppliers require you to put in large orders in order to get the best rates or prices.
You may also find it difficult to secure financing from lenders because you do not have an established business or proven track record.
So whether you choose to start your own business or buy a franchise, they both require work. So be prepared to put in the work to be successful.
Leave me a comment. What would you do? Start your own business or buy a franchise?