Franchise vs. Startup: Which Way to Go

Reviewed by Akhilesh Ganti

You know that you want to run your own business but can’t decide whether you should buy a franchise or launch a startup from scratch. Creating an overview of the pros and cons of each option can help you decide which one is right for your situation and personality.

Key Takeaways

  • When it comes to starting a business, there are pros and cons to choosing to open a franchise or start your own venture.
  • Franchise owners benefit from being part of a larger, successful company that has already paved a successful path that will generate profits. While having a steady paycheck is enough for some people, being tied to a bigger organization can also be challenging.
  • Individuals who believe they can build a better mousetrap and want the freedom of entrepreneurship may be better off launching their own startup.

Franchise: The Pros

At its best, franchising provides an opportunity to buy into an existing, successful business model that comes with a proven track record, a successful training program, a solid supply chain, and expert technical support. Some of the best-known franchises have impressive success rates, with the chances of failure hovering in the low single digits. By purchasing a franchise, you get a turnkey business that is ready and waiting for you to take the reins. If you are detail-oriented, good at following directions, and comfortable with established systems, franchising provides a quick and easy way to become a business owner.

Depending on the franchise you select, you may have the choice of either purchasing a fully operational location or starting from the ground up at a new location. The former option enables you to step right in and take over a business that has an existing customer base, documented cash flows, and a workforce already in place.

Franchising also provides a clear exit plan. When you are ready to retire, you can sell an existing, well-known business to another would-be franchise owner. Do you want to build a business or do you prefer to get started with a fully operational business on day one? Either way, franchising would be an option for you.

Franchise: The Cons

Franchising also poses challenges. Purchasing a franchise can be an expensive proposition, with costs often running as high as $500,000 to $1 million. Franchises also come with ongoing expenses that reduce your take-home pay. There are fees that must be paid to the home office on an ongoing basis, mandates (such as remodeling at a hotel or price reductions for a promotion at a restaurant) that eat into profits, and supplies that often must be purchased at inflated prices.

While general statistics cite franchise failure rates at an average of anywhere from 10% to 20%, even those statistics can be a bit misleading. Some franchises fail at a rate of just 1% (arguably giving you a 99% chance of success), while others crash and burn at a rate of more than 40%. Clearly, not all franchises are created equal, so you need to look carefully before you take the leap. It’s also important to keep in mind that purchasing a franchise is like buying a blueprint for success; like all blueprints, it only works if you follow it.

Corporate-level scandals, actions, and mishaps can also have negative effects. Consider how the owners of Chick-fil-A franchises had to deal with protests and backlash when the firm’s CEO made comments about same-sex marriage or how Subway franchise owners felt when the FBI charged long-time Subway pitchman Jared Fogle with distributing and receiving child pornography. If you dislike having your livelihood tied to somebody else’s image, you may want to steer clear of franchises. Ultimately, the franchise owner runs the business but the home office is the boss. If that sounds too constraining for your style, you might be better off starting your own business.

Startup: The Pros

If you’ve got an idea, you may be able to turn it into a business. Sam Walton did it with Walmart, Bill Gates did it with Microsoft, John Schnatter did it with Papa John’s, and countless other entrepreneurs have done the same. With startup costs that could be as low as $10,000, having your own business—whether full-time or part-time, in your basement, your garage, or even out of the trunk of your car—is significantly less expensive than the costs associated with many franchises. And if all goes well, your unique idea may become its own franchise one day. If you dream big and want a shot at the big leagues more than you want a steady paycheck, launching your own business may be the right move for your personality.

Most important for many budding entrepreneurs, building your own business makes you the boss in every way possible. That is the beauty of being self-employed. You make every decision. You set your schedule. You run the show exactly the way you want to run it. Nobody can tell you what to do because you own the business. If you know how to build a better mousetrap or run a better business, this is your chance to prove it to yourself and to the world.

Startup: The Cons

When you start your own business, you are on your own. Much is unknown—will the product sell? Will customers like it? Will you make enough money to survive? The failure rate is also high. Statistics show that 20% of startup businesses don’t survive the first year; about half make it to year five; and approximately 35% last ten years. 

If your business is going to survive, you alone will have to make that happen. To turn your dream into a reality, you can expect to work long, hard hours with no support or expert training. If you try this on your own without any experience, the deck is stacked against you. If this sounds like too big a burden to bear, the franchise route may be a wiser choice.

For a closer look at the challenges you will face, compare a mom-and-pop hotel to a nationally known chain. Among the tools available to a chain (that you won’t have with your own small operation) is the beautiful facade of the building, the pre-planned maintenance upgrades that keep the lobby and rooms looking good, the housekeeping system that maintains the rooms’ cleanliness, and the state-of-the-art revenue management software at the front desk. The same comparisons can be done with restaurants, auto repair facilities, copy shops, and many other businesses. If, on the other hand, looking at the competition leaves you convinced that you can do it on your own, it’s time for you to get started.

The Bottom Line

People purchase a franchise because the model works. It offers careful entrepreneurs a stable, tested model for running a successful business. It also requires them to operate on someone else’s business model. For those with a big idea and a solid understanding of how to run a business, launching your own startup presents an opportunity for personal and financial freedom. Deciding which model is right for you is a choice only you can make.

Read the original article on Investopedia.