Entrepreneurs: Should you start a business or buy a franchise?
As a qualified, well prepared and well-funded entrepreneur, there is no better vehicle for achieving goals than to be in business for yourself. A business is simply a process designed to advance goods and services to the marketplace in order to create value and profit for owners and customers. Of the many options posed for those entering business, prospective entrepreneurs eventually wrestle with our question: “Should I start a business or buy a franchise?”
The answer? It depends upon your personality type, how much money you can muster up, your risk aversion and your skillset. It also depends on your aptitude to plan and execute. Overall though, it depends upon your drive, determination and ability to persevere.
Obviously, millionaires are built on platforms other than franchises or traditional start-ups. Distributorships and MLMs are two examples. MLMs are easy and inexpensive to set up, but success rates are horrible. Distributorships are restrictive and can range from simple home based models to huge warehouse facilities. Furthermore, for a business prospect to be successful with a distributorship, you better hope that the brand you represent has staying power. Ask some old Schlitz beer distributors about that!
Advantages and Disadvantages of Buying a Franchise Versus Starting a Business
They are similar in the fact that the US congress has set up the tax code to give advantages to both types of business owners. Both require detailed business plans and adequate funding. The elements of recruiting, hiring and training are inherent to both. Both require precise marketing plans, IT systems, experienced administration and some sort of invoicing and payment processing. They seem pretty similar, don’t they? No to mention that if an office is required, both will have sites to identify, leases to negotiate, furniture, fixtures, equipment and signage to install. So far they both sound the same. However, that’s where the similarities end.
I ran into an interesting article by Funders & Founders that showed a first time entrepreneur’s startup business success rate at less than 1 in 5. Now, it did show a higher success rate as those same entrepreneurs continued to fail on their second at a rate of 5:1 but improved to about 30% with their third venture, IF it was backed by venture capital and went public to IPO. Still less than 1 in 3…not too impressive!
Let’s take that same model one step further, since they included venture capital into the mix. Earlier we had examined everything it takes to open a business from business plans to signage, that all costs money. So, let’s take a very modest and conservative estimate of $100,000 for each new opening. At that rate the average entrepreneur will have spent $300,000 to have a 70% shot at another failure. Now that’s an expensive learning curve. They will most likely have to try it again and risk another $100K . Really? Over my wife’s dead body!
So, are the odds of success better in operating a franchise?
Not being prepared to manage a business through the ebbs and flows of an up and down economy decreases the odds of success in any business. To increase the odds of success, there are a couple key things available to prospective franchisees that are not available with traditional business startups: mandated disclosure and validation.
The selling of franchises is heavily regulated by the Federal Trade Commission in an effort to maintain a level of integrity and honesty in the process. The FTC requires that every franchise maintain, and in some states submit for approval, a document called a Federal Disclosure Document or FDD (formerly called a Uniform Franchise Offering Circular or UFOC). This is a cumbersome and wordy document strewn with legalese, but it discloses just about everything you would want to know about a franchise. The document includes all costs (real or expected), a short history of the executives, any bankruptcies or litigation, franchisor expectations of new franchisees and what the franchisee’s expectations should be of the franchisors. However, the most important disclosure required is a list of all current and past franchisees with contact information.
Before making the decision of whether to invest in a franchise or not, every savvy potential franchisee calls as many of the franchisees on that list as it takes to get a clear understanding of the true value of the franchise. This is a game changer.
As a result of mandated disclosure and thorough validation, potential franchisees learn the true value of the franchise or their interest, including:
- Industry and public respect for name brand and trademarks
- Level of proven success behind the business model
- Effectiveness and franchisor commitment behind the training programs
- Reputation and effectiveness of plug and play IT systems for operations, sales and back office management
- Value of the franchise culture of support, evolution and teamwork
In conclusion, everything from the business plan to the signage is similarly required of any business. It stands to reason that finding a franchise that offers all the above at an affordable cost makes the decision of whether to buy a franchise or start a business an easy choice.