Franchises and startups can both be considered a way of “running your own business,” though they differ substantially in terms of setup, cost structures, creativity, and direction. In this article, we’ll go over the differences between a franchise vs a startup, the pros and cons of committing to each, and how to decide which business is a fit for you.
Franchises
A franchise is when an established and successful business entity (called a franchisor) grants an individual (called a franchisee) license to use its knowledge, practices, business model, and intellectual property for a period of time to sell and generate profit. The franchisee keeps some of the profits earned during this period but also pays the franchisor one-time and ongoing fees, royalties, and percentages of the franchisee’s sales.
Pros of Franchising
One of the main appeals of buying a franchise is that the franchisee is buying into a brand and business model that is already established and successful.
- Established brand and reputation: A franchisor gives a franchisee permission to use its business formula and branding. This comes with a set of practices, procedures, and rules, which have been tried and tested and are known to generate profit. All the franchisee needs to do is follow the formula and stick to the rules, and revenue is likely to come in.
- Faster time to profitability: Franchise businesses also tend to enjoy a faster time to profitability compared to startups. Having a time-tested set of procedures to follow means you’ll need to do much less experimenting to find a formula that works—which means you can start generating profits almost immediately. Of course, this will still be affected by other factors such as location and what kind of customer base is in the area.
- Support from the franchisor: Apart from its established business formula and reputation, the franchisor will often provide the franchisee with ongoing support in the form of training, documentation, and access to other forms of know-how. The franchisor will do this because it wants the franchisee to succeed and generate ongoing revenue (mainly because the franchisor will benefit from this as well).
Cons of Franchising
While this model permits the franchisee to ride on the established success of the franchisor, it does not mean that franchising is a guaranteed path to success or without difficulties.
- Fees and royalty costs: Getting a franchise license involves paying lots of costs to the franchisor. The exact terms will depend on the franchisor and your agreement with them, but expect to pay: an initial start-up fee; annual licensing fees; training, equipment, and supplies costs; and royalties or sales percentages. Depending on the franchise, initial investments can be less than $3,000 on the low end (and over $1 million on the high end); royalty fees can reach as high as 20% or more, taking away a big chunk of your profits.
- Lack of control and creativity: One of the foremost challenges with running a franchise store is that you will have little control over the business, and little opportunity to express any creativity. The foundation of franchising is that you are obtaining a license to use an existing business model; this means that for you to make any profit, you will have to adhere to the franchisor’s rules very closely. You will have little control over how your store looks, operates, and advertises.
- Reputation concerns: Obtaining a franchise business means that you can ride on the established reputation of the franchisor in order to sell and make your own profits—well and good. But the other side of the coin is that any damage to the reputation of the franchisor will also affect your own business. If anything happens to make customers or the general public feel negatively about the parent brand, they will feel the same about your business.
Startups
A startup is a new business that an entrepreneur creates from scratch, and attempts to grow and develop over time. There are no pre-existing business models, intellectual property, or processes to borrow or license. However, the new business owner often seeks additional starting capital from lending institutions or investors.
Pros of Startups
Startups are often touted as a way to be your own boss while making money. If you value freedom and autonomy above all else, you’ll find more meaning and enjoyment on the startup path rather than getting a franchise business license.
- Complete control and creative freedom: Unlike a franchise in which you are obligated to follow the existing model and processes of the parent brand, you’ll have essentially complete control and creative freedom with a startup. You can develop and create the products and services you want, market and advertise your offerings as you please, and shape your brand identity to exactly match the vision in your mind.
- Lower initial and ongoing costs: With a franchise, you’ll pay significant fees and royalties to your parent brand. Even if you make profits quickly, a chunk of these earnings will go toward paying your obligations. With startups, any profits you make are yours to keep and re-invest into the business (unless you have startup loans to pay back; but these will not last forever). Setup costs for simple small businesses run to about $12,000, with some being monthly or yearly costs (employee wages, utilities, taxes) and some being one-time or rare expenses (business registration, hardware, storefront purchases).
- Learning opportunities: It’s often said that you learn more by running your own business for one year than by working for someone else for five. Starting and growing your own business from scratch will give you a real-world crash course on financing and budgeting, product development, customer service, small business marketing, website building, and a host of other skills that will always be valuable. If your business does well, you’ll know that you got there on your own. If it fails, you’ll have learned crucial lessons you can apply to future endeavors.
Cons of Startups
Taking the path of a startup comes with its own challenges, namely the initial lack of any guarantees, security, and close support. Think of the startup route as high-risk, high-reward—as well as high learning opportunities.
- Uncertainty: While it’s true that you have lots of control and creative freedom when starting your own business, the flip side is that everything will be uncertain. You will never know for certain whether your ideas and strategies will bear fruit, and by the time you find out, you will have expended time, energy, and money. You will need to accept the reality that—at least in the early stages—you may frequently be making business experiments that cost you resources but do not deliver the results you want.
- Labor intensive: Running a startup means that you will be your own boss, but it doesn’t mean that you’ll get to slack off. If anything, entrepreneurs work harder than employees do, especially in the beginning stages of a startup. Before you hire your own employees to take some of the load off you, you’ll be doing everything yourself. You need to be ready to work long hours with little financial payoff as you slowly build up your brand reputation, customer base, and sales numbers.
- No brand recognition: When getting a startup off the ground, you will start out with no market share, no customer base, and no reputation to carry your brand. Even if you’re offering high-quality goods and services, if you don’t market effectively or aren’t able to grab consumers’ attention, your offerings will go to waste—no one will notice you, let alone buy from you. Add the competition you’ll be experiencing from other startups and established businesses, and it’ll be a long uphill fight.
Franchise vs Startup: Factors to Consider
Deciding between franchise vs startup is a nuanced and personal decision—one that you can only make yourself, even if you get advice from others. In the end, you’ll be the one who bears the costs and reaps the rewards of whichever path you choose.
Here are some factors to consider when deciding between a franchise or a startup.
Risk Tolerance
What level of risk are you willing to accept and work with? If you prefer a low-risk approach, franchising will be a better fit for you, as you’ll be buying into an established brand with a strong reputation and proven business methods for you to follow.
If you’re willing to be more daring and favor a high-risk high-reward approach, then give the entrepreneurial startup path a shot. You’ll be jumping into the deep end without as much guidance and support as you’d get from a franchisor, but the rewards are potentially greater and more satisfying.
Initiative & Creativity
How much initiative are you comfortable with taking? How creative are you naturally, and how far are you willing to stretch that creativity? If you prefer following existing systems that have worked in the past or if you prefer predictability to drastic innovation, a franchise business is the way to go.
If you are highly creative, perceptive, and able to detect problems and opportunities on your own and think up new solutions to pain points—then try your hand at starting your own business. You just might possess the drive and business sense to become an entrepreneur.
People Skills & Leadership
Franchising and running a startup will both require people skills. With the former, you’ll be negotiating and coordinating with franchisors as well as taking instructions and directions; with the latter, you’ll be networking with other businesses, marketing to customers, and giving instructions and directions. When running a business (especially once you hire your first few employees), you’ll also need to display leadership skills, conviction, long-term planning and strategizing, and the ability to discipline people when necessary.
Frequently Asked Questions (FAQs)
Click through the sections below to learn more about the differences between a franchise business and a startup.
With a startup, you’ll be creating the entire business from scratch: products and services, processes, customer acquisition, and more. You will assume full responsibility and control of the enterprise. With a franchise business, you’ll be following the business model and processes of an established business. Things will be more predictable. You’ll be following instructions instead of giving them. You will have to pay fees and royalties to your franchisor.
It depends on what you mean by “better.” Franchising is generally lower-risk than starting your own business; however, it may also be less rewarding financially. You will have less control over your own operations, but things will also be more predictable.
With franchising, you’ll have little control over how your business operates. You will be required to run your shop exactly the way your franchisor wants—you are borrowing their business model after all, so you’ll need to do things the way they would. They will also claim starting fees and ongoing royalties, which may be substantial.
Bottom Line
Franchise businesses and startups can both be rewarding, and both involve their own share of work, sacrifice, and risk. Use the pros and cons described in this article to make an informed decision, choose the option that best aligns with your goals and preferences, and put in the work—and then reap the rewards.
