Pros and Cons: Startups and Franchises

02/24/2021

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My late father, when speaking to potential business owners, would always ask them if they wanted to “own what they do.” I always liked that term.
If that’s what you’re thinking of doing, I’m going to go over two ways you can do it, along with the pros and cons of each of them.

Startups
If you’re entrepreneurial-minded, a pure startup business is the way to go. That’s because you can use 100% of your creative juices 24/7.

In a nutshell, you are the person who:
•Comes up with a business idea
•Puts together the business plan
•Creates relationships with lenders
•Tests and perfects your idea
•Creates distribution channels
•Puts together the marketing plan
•Creates policies and procedures
•Hires staff
•Negotiates the commercial space
•Opens the business

As you can see, your plate will be full. The hours needed to start your business will be long and hard. But if you believe in your business idea, and you’re willing to see where your idea will take you, those long hours will be good hours. After all, this is your “baby” we’re talking about here.

Pros and Cons of a Startup
If you’re thinking of starting your own business, based on your idea for a needed product or service, there are a few things you need to know before you dive into the pool.

The Pros:
•You own the idea
•You’re the Creative Director
•You retain all of the equity
•You can run your business as you please
•There are no rules
•You keep 100% of the profits

The Cons
•Your total upfront investment is unpredictable
•You don’t have a clue as to when you’ll break-even
•You can’t get a good handle on your expenses at first
•Your risk is big, because you don’t know if your idea will work
•You’ll be under tremendous pressure to make your business profitable
•All in all, when it comes to a startup, the risks are high, but your potential financial rewards can make the risk worth it.

Franchises
Franchise businesses are quite popular. When you stop to think about it, the idea that you can open a business up in a short period of time, using a proven business formula with an upfront cost that’s fully disclosed, is attractive. But as you’ll see, franchising is not for everyone.

Pros and Cons of Franchising
Over the years, franchising has enabled hundreds of thousands of people to go into business for themselves. There are many reasons why franchising works.

Franchise businesses provide:
•A proven business model
•A business system that’s been tested and proven to work
•Technology that helps you, as a franchisee, stay efficient and organized
•Marketing programs you can use immediately
•Support from headquarters
•A network of fellow franchisees that you can quickly contact when you run into problems

On the flipside, as good as franchising is, it’s not perfect.

For instance, as a franchisee:
•You’ll be required to follow the business system and represent the brand as specified in your franchise contract
•You’ll be paying royalties to your franchisor for the life of your business
•You may have to spend money on things like technology upgrades, re-branding, new store designs and/ the like that your franchisor requires
•You’ll only be able to buy products from approved vendors
•If the national brand experiences negative publicity, your local business may be affected

Given these points, if you’re thinking about going the franchise route to get into business, you need to make sure you’re comfortable with the restrictions placed on you as a franchisee. That said, I’m going to answer the question you have running through your head. That question is: “What is a better way to go into business; a startup or a franchise?” My answer is that both ways can be good. If you have an idea for a business, and you really believe in it, you need to seriously consider a startup. If you would rather leverage someone else’s business idea to own what you do, and you’re comfortable with following rules, you need to investigate the franchise model.

Blog by Joel Libava, Guest Blogger

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