Some people confuse startup businesses with franchises. If you’re one of them, then let me tell you there is quite a difference between both of them.
A franchise is a type of business in which someone else owns the brand. Examples of franchises include Subway, KFC, McDonald’s, Maaco and Marriott hotels. While in a startup business, you own the brand.
Small business entrepreneurship or franchising are both ways to business, and both have their advantages and disadvantages. With a startup business comes the benefit of brand ownership but needs marketing for brand awareness. On the other hand, franchises already come with brand awareness.
Let’s dive into more details and find out which way of business is for you.
Comparison Between Small Business and Franchises
If you walk into any franchise of McDonald’s around the world, you will find the same meals with the same taste and quality. McDonald’s are known for their meals around the globe; hence this is called brand awareness. With franchises comes brand awareness, while if you are starting your own business, get ready to spend on marketing.
If you’re starting your own business, then you need a budget for marketing. Every penny for marketing will come out of your pocket in case of owning a business. On the other hand, if you own a franchise, you have the power of the brand’s multi-million-dollar national advertising behind you.
With your own business comes the power of autonomy. Autonomy means you control each bit of your company, and you lay out the rules and regulations. In a franchise business, you follow the laws of the franchise company. Remember, franchisees don’t own the franchise unit. They only have a legal agreement to use the company’s name, equipment, operating system, uniforms, etc.
Equipment and Supplies
As a business owner, you have to research what equipment you need. Also, you have to know how much quantity of the equipment/supplies you need.
Suppose you are starting a food service business. And you buy a large oven that is unnecessary and wastes money that can be used on other business areas such as marketing. Or you buy a small oven that can’t fulfil the orders on time when the demand is high.
In such cases, franchise business stands out as franchisors provide valuable information on what to buy and how much (sometimes at reduced prices).
If you’re creative, innovative, and entrepreneurial-minded, then you can go for your business venture. But if you don’t want to reinvent the wheel, then the franchise is the way to go. Franchise business is like ‘plug and play’; just follow the manual, and you’re good to go.
Most franchisers don’t provide financing, but they can refer you to lenders who prefer to give startup funds to franchises rather than startup businesses.
If you’re starting your own business and you lack startup capital for your business, then here are some of the ways a small business can get startup capital:
- Venture Capital Finance,
- Government Departments and Agencies,
- Business Funders and Incubators,
- Angel Investors,
- Credit Cards,
- or Friends and Family.
We already have an in-depth article written on getting startup funds; click here to check it out.
Exit plan/Resale Value
Selling an independent business is very lucrative, but finding a potential buyer can be hard though. People prefer the safety and familiarity of a known brand over private business. It might be harder to sell your private business at a tough time, and you might end up bargaining at basement price and that also if you’re able to find a buyer.
When people buy franchises, they have to pay royalties and other fees to the franchisors. These ongoing expenses narrow down the profits and put you under stress. With your private business, you don’t need to pay any fees to anyone.
Owning a private small business is thrilling, but it can be hard to succeed. According to statistics by Fundera, around 20% of businesses don’t survive their first year. 50% of businesses fail by their fifth year, and about 70% fail by the 10th year. On the other hand, 90% of franchises succeed.
You May Own a Franchise in the Long Run
Starting a solid business can make you own a franchise in the long run. Then you’ll get all the fees and royalties. Buying an existing business is hard to expand as it tends to remain the same size. But you can scale up your private business as much as the market allows.
Pros and Cons of Franchise:
Franchise: The Pros
- Provides an opportunity to buy into an existing business model
- Comes with a proven track record
- Have a successful training program
- Have an excellent supply chain
- Provides technical support
- High success rates
- Easy to start – a quick way to become a business owner
- Franchising offers a clear existing plan
- Easy to sell the franchise as it’s well known
Franchise: The Cons
- Purchasing a franchise can be expensive
- Franchises also come with ongoing expenses that can reduce your profits
Pros and Cons of Startup:
Startup: The Pros
- You can turn your idea into a multi-million dollar business as Bill Gates did with Microsoft
- Startup cost could be as low as $10,000
- Your business can be your part-time side hustle
- Building your own business means you will be the boss in every aspect of the company.
Startup: The Cons
- There is always uncertainty in new business, such as will my product sell? Will the customers like it?
- The failure rate is also high – By the end of the fifth year, 50% of startup businesses fail
- You have to work long, hard hours without support or training
What are the 4 types of franchising?
- Single Unit: It is a business in which franchisors grants the franchisee the rights to open and operate one franchise unit.
This single unit franchising is the most common and most straightforward type of franchise. The newcomers mostly opt for this type due to its simplicity and to get ‘their feet wet’.
- Multi-Unit: It is a business in which franchisors grants the franchisee the rights to open and operate more than one franchise unit.
Typically there will be a schedule that will determine when a franchisee opens the units.
- Area Development: This is a type of business in which the franchisee has an agreement to open multiple units during a specified time and specific area.
Franchisors grant the rights to the franchisee for the development of that territory.
- Master Franchise: Master Franchise is the hidden gem of this business. Master Franchise has more rights than Area Development Franchises.
In addition to the Area Development rights, the franchisee also has the rights to sell the franchise in the local territory.
Are franchise owners small businesses?
A franchise is a small business with an established brand name and must pay annual royalties to the franchisors. (Franchisors are the owners of trademarks).
What percent of small businesses are franchises?
According to SBA’s Office of Advocacy: 2.9% of total firms are franchises in the US.