How to Make Money

Should You Buy a Franchise, or Start Your Own Business? Here’s What to Consider

by Jamie Cattanach
Contributor

Do you dream of owning your own business?

Maybe you crave the freedom of being your own boss — or have a vision for a unique addition to your industry. Maybe you’re just one of those folks with a passionate entrepreneurial spirit.

Maybe you envision yourself covertly sipping a perfectly foamed latte behind your laptop at your very own café while watching tons of happy customers who have no idea you’re the one behind the operation.

OK, OK, that’s my business fantasy. Did my specificity give me away?

Franchising or Starting From Scratch?

If you have the startup capital, investing in your own business could be a once-in-a-lifetime opportunity to gain financial stability and personal fulfillment.

But no matter which industry you’re in, you’ll face a difficult decision: Do you start a private enterprise, or open a franchised location?

Both options have their pros and cons. But here’s some insider info on how to figure out which route will best help your business flourish.

The Pros and Cons of Franchising

Franchising can be alluring even to the biz-illiterate among us, as long as we have a decent chunk of savings.

It’s easy — and tempting — to browse potential future business ownership options the same way we browse clothing catalogs.

They’re even broken down by initial startup capital required: super low-ball franchises under $10K, middle-of-the-road franchises under $50K, and all-in franchises of $100K or more.

Who knew it costs $2 million to open a Taco Bell? It’d take a lot of dollar menu orders to get you back in the black.

Upsides

Buying a franchise amounts to buying an existing vision instead of developing your own.

It saves you the time and effort of developing all the minutiae of a fully fledged business plan from scratch.

This ranges from the difficult, big-picture stuff — market research and branding campaigns — to details like employee handbooks, interior décor schemes and vendors for raw materials and equipment.

Arguably, the main benefit of purchasing a franchise is built-in brand recognition.

No matter how good your burgers are, everyone already knows about Five Guys. Buying a franchise gives you pre-baked marketing, and a better chance at success.

Plus, you’ll have operational resources and mentorship from headquarters. This can help you get through tough times or when you run into a situation that stumps you. Terms can vary, though, so check your franchising agreement.

Franchising is most likely an easier route, especially for first-time business owners. And as mentioned above, you don’t always need a ton of money to get started.

Downsides

Of course, all those benefits come with costs.

Literally.

When you buy the rights to operate under a branded franchise name, you pay more than just the initial franchising fee. All the big sum does is get your foot in the door.

You’ll be contractually obligated to pay regular, ongoing royalty fees, advertising fees and other potential fees to your franchisor.

In short, you’ll owe a portion of your gross profits to the big guys upstairs. Depending on your agreement terms, they might even be allowed to reach directly into your bank account to get it.

Of course, your ability to scale and expand your business will be limited by the terms of your agreement. You’ll also have little input about changing the way your business runs.

In the end, you’re functionally operating as a representative of the mother company, and momma’s word is law.

Plus, all the stuff you’re buying pre-made with a franchise, like the interior design, logo and the script for the 30-second TV spot? For many, those are the real “dream” parts of opening your own business.

“Franchises are so limiting, and the fees absolutely kill you,” says ex-UPS Store owner Chris Dyson. If you own just one location, he says, “you are simply buying a job with a poor wage and huge responsibilities.”

Although his UPS Store generated $400,000 in sales the first year and received top rankings in customer service, compliance and quality, he says he didn’t enjoy much profitability.

He has no plans of future franchise ownership, unless he’d be able to open multiple units to drive profits.

But, franchise consultant Tom Scarda reports it’s “a well known and published fact that generally, franchises are more successful than a start up.”

“A franchise is a business with training wheels,” says Scarda, author of “Franchise Savvy” and “The Magic of Choosing Uncertainty.”

Although franchising is often more expensive than starting and operating a private startup, he believes owning a franchise is more cost-effective. He should know — he’s owned two franchises and three non-franchise businesses.

In the end, the success and cost-effectiveness of a franchise will depend on which franchise you purchase, the location and, as always, a little bit of dumb luck.

You might have enough cash in the bank to give it a go, but you may have noticed the names on those “franchises under $10,000” lists aren’t very recognizable. (There are some exceptions; it only costs $10,000 to open a Chick-fil-A.)

Unless you have the cash to go all-in for a guaranteed winner, like a $14 million highway-side Hampton Inn & Suites, you may be better off hoarding your pennies to spend on a project closer to your heart.

Going It Alone

Franchising starting to sound a little more scary than sexy?

You might consider creating your own path — and your own startup.

If you’ve heard the term “unicorn” being tossed around without any reference to sparkly hooves, you know some startups are incredibly successful.

Heck, we here at The Penny Hoarder fit the successful tech startup description!

But the slang term “unicorn” was coined because, well, successful startups are pretty rare — and massively successful startups are almost unheard-of.

Going solo guarantees you creative freedom, ownership of all your profits and the ability to forge your business exactly as you see fit.

But you take all the risks involved with investing a large sum into a project that may very well just… flop.

This isn’t to say you shouldn’t give your small business a go. Many small business owners work hard and make a good living doing what they love, acting as their own boss.

They might own restaurants, coffee shops or boutiques you frequent. They might be freelancers who market their skills — be it cleaning houses, personal training, massage therapy or writing.

But you should be aware the private road can be perilous — particularly if you’re a business newbie.

“Usually, a private business is started by someone who has a great idea but no real-world business operation experience,” says Scarda. “Because of lack of experience, they may make mistakes that could end up costing [them].”

It could cost even more than the fees franchises require, he warns.

But many have found fulfillment and success in the world of the privately owned small business.

Candice Galek, owner of Bikini Luxe in Miami Beach, FL, says she chose to open her own store instead of a franchised bikini shop. The franchise would’ve cost her a required $10,000 franchise fee and monthly $1,000 fee.

“It was difficult at first,” she said, “as the learning curve doing things without a franchise behind you can be sharper. But at the end of the day I am extremely happy I chose to do it on my own. I was able to put that initial money back into my business and not have an extra monthly overhead.”

She also mentions her business has been a runaway success, and she’s enjoyed the opportunity to think outside the box with branding and advertising campaigns.

Dyson, who ditched his franchised UPS Store for the self-made entrepreneurial venture of writing a book and opening a goalie school (yes, as in hockey), says the move also was beneficial for him.

“In private business, you are in complete control and can make changes on the fly as needed,” Dyson says.

“The recognizability is not there, so the initial launch is always much more difficult, but the rewards and satisfaction are much higher (at least for me as an entrepreneur).”

While it may be a more risky venture, private business ownership might have more potential to leave you feeling fulfilled and fully independent.

Which Will You Choose When You Start a Business?

Unfortunately, there’s no simple right answer to this complicated question, but choosing wisely can make or break your business venture.

The choice is ultimately rooted in a variety of individual factors. It depends on what kind of business you want to run, how much entrepreneurial experience you have and how much startup capital you can wrangle.

No matter your choice, be sure to first do plenty of your own research. Make sure you know what you’re getting your hands (and bank account) into!

Your Turn: Would you rather open a franchise or start your business privately? Let us know in the comments!

Jamie Cattanach is a junior writer at The Penny Hoarder. She also writes other stuff, like wine reviews and poems — follow along at www.jamiecattanach.com.

by Jamie Cattanach
Contributor for The Penny Hoarder

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