Invest in a franchise or go it alone?

22/05/2018 17:00 | Start a business

Should you invest in a franchise or go it alone?

Fear, anticipation, excitement. These are just some of the feelings that many entrepreneurs have experienced when they’ve considered becoming their own boss. After all, becoming a business owner is a huge career step and will impact your personal, as well as your professional life.

Once you’ve decided what type of business you want to start, the next decision you’ll have to make may prove a little more difficult. Do you start a new business from scratch, or do you invest in one of the 900 franchise brands currently operating in the UK?

The answer will be different for everyone. Both choices have pros and cons, and only you can decide which path is the right one for you to take. There is no right or wrong answer but to help you choose between the options here are some critical differences between the franchise model and an independent business.

1. Creativity vs security

A franchise works very differently to an average small business. The main difference is that with the franchise model, franchisees don't have as much control as an independent business owner. The franchisor decides vital elements of the business such as the products sold, and the services offered. There are many rules to follow to protect the consistency of the brand which results in profitable franchises. If you find it difficult to adhere to the rules, then a franchise business may not be right for you.

However, with the strict rules and obligations that come with being a franchisee, you also get security. When you invest in a proven business model, you know that all elements of the franchise have been tried and tested, both by the franchisor and other franchisees. You get to benefit from the time, effort and money that the franchisor has invested into developing and perfecting the franchise and therefore don’t have to make the same mistakes along the way.

In short, franchisees do have to sacrifice their creativity to a certain extent, but in return, they get to enjoy the security and stability of being part of a well-established business.

2. Upfront costs vs ongoing costs

The costs associated with starting any business can be significant, but the difference between franchise brands and a company you start from scratch is the timing of the costs. When you're setting up an independent business, you're likely to need to invest quite heavily while you're establishing your new venture. The cost of purchasing stock, equipment, vehicles, premises as well as developing the infrastructure of your business results in a significant financial outlay before you can even start trading.

In comparison, franchise businesses tend to have lower upfront investment costs. In return for a relatively modest franchise fee, franchisees have most things in place ready for them to launch their new business. However, unlike an independent business, franchisees also have to pay ongoing fees to the franchisor. These can include royalty and marketing fees which are generally calculated as a percentage of gross sales. The obligation to pay these fees is on top of regular ongoing business expenses such as the rental of premises or the lease of a vehicle.

3. Brand reputation vs brand reputation

Brand reputation can be good or bad. In most cases, franchisees have an advantage over independent business owners when they choose to invest in recognisable franchise brands. It can take years of effort and expense to build up a brand reputation, yet franchisees immediately benefit from the hard work of the franchisor with a well-known name and a ready-made customer base.

Of course, there are two sides to a reputation, and it may not always be positive. As a franchisee, you rely on the franchisor and other franchisees within the network to protect the status of the brand. The reputation can be tarnished through no fault of a franchisee however their business is impacted. This is a risk that independent business owners don’t have to be concerned about.

4. Support vs independence

The franchise model is perfect for first-time business owners. As well as benefiting from a proven business system, the training and support that's provided are ideal for budding entrepreneurs who are inexperienced in running a business. Franchisees are not only taught the operational know-how to operate profitable franchises, but also gain essential business ownership skills. These are invaluable to new franchisees who would otherwise have to learn on the job.

Many independent business owners would appreciate the training opportunities that a franchisee has. But, despite not receiving the same support as franchise owners, they do retain total control over their new businesses. This is where having an awareness of your personality type is crucial to making the right decision. If you're willing to learn to become successful, then the franchising route may be suited to you, but if you have a fiercely independent spirit and you like to be in control, then you may thrive by choosing to go it alone.

5. Survival vs risk

There are many different stats regarding the survival rates of franchises versus independent businesses. According to the British Franchise Association / NatWest 2015 Franchise Survey, only 1% of franchised businesses closed their doors due to commercial failure. Compare this to a study performed by Ormsby Street, and there is a noticeable difference. The research found that even though 91% of small businesses survive their first year of trading, just 40% are still in business five years later.

Buying a franchise is no guarantee of success but the ongoing support that’s provided certainly appears to contribute towards the longevity of franchisees. It should be remembered though, that whether you choose to invest in a franchise or set up a business in your own right, doing your homework is paramount to your success. Make sure that you carefully research your chosen path before you take your first steps to business ownership.

There is no definitive answer to the independent business versus franchise debate. Instead, you need to thoroughly assess the differences between the two-business model, discuss your options with your family and professionals, and decide which one is right for you.

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