If you’re having trouble deciding which type of business is right for you, it’s time to take an in-depth look at the differences between owning an independent business versus a franchise. Both options have benefits and challenges, and both will make your dream of business ownership a reality, but the trick is determining which is a better fit for your strengths, personality and goals.
Here are a few ways running an independent business differs from franchising.
Both independent businesses and franchises give you the chance to be you own boss and take control of your finances, but they can differ in terms of the lifestyle they offer to owners. If you’re looking to set your own hours and have the freedom to volunteer at your child’s school or take regular vacations, an independent business may be best as it allows true autonomy of scheduling. You can work whatever hours you want — even third shift, depending on the type of business. Franchises, however, usually have set hours that are determined by the parent brand — especially for brick-and-mortar stores — that may make it hard to take consistent extended breaks during work hours.
However, what franchises lack in schedule flexibility, they make up for in support and training. When you become a franchisee, you’re paying to use a business model that’s been proven successful in other markets. This includes marketing materials, best practices for hiring and even a territory to call your own. So when independent business owners have to put in long hours creating and tweaking their business strategy before they even open their doors, franchisees just need to implement what’s already been established.
Ownership & Decision-Making
If it’s important for you to have control over every single decision in your new business, then an independent start-up may be a better fit for you. From the strategic details of your business plan to the color of pens you’ll purchase for the office, every decision will come back to you as the owner. Until you’ve hired staff to delegate to, the full responsibility is yours.
Franchise owners don’t have the same amount of decision-making responsibility — a relief to some — but they also don’t have the same freedom to make changes to their products or services. Some franchisees are willing to give up that independence in exchange for gaining the security and stability that comes with an established business model. But others don’t enjoy set guidelines and would rather hold more responsibility, even if it does require more time and energy. It all depends on your personality and where you feel the most comfortable.
Directly comparing the cost of starting a franchise versus an independent start-up is tricky, but there are differences in expenses that you should be aware of to better evaluate your budget and cash flow. If you open a franchise, you’ll need to pay not only an upfront franchise fee, but also a location build out price and an ongoing monthly fee (either a flat rate or a percentage of revenue) that allows for continued use of the brand’s name and practices. The initial investment varies greatly — there are many franchise options under $50,000, but several of the larger, well-known brands can cost hundreds of thousands of dollars upfront. The price and mandatory franchise fees have little room for negotiation and usually cost more than an independent business upfront, but you have the benefit of a fully operating business as well as built-in brand recognition.
Intuit reports that the average cost of launching an independent business is closer to $10,000. The lower initial price tag is likely related to the control the business owner has over the size of the operation. For example, independent business owners can delay their business’s opening or downsize before launching if the budget doesn’t allow for full-scale operations. Start-ups do require more money spent over time to maintain and grow the business, such as marketing materials, HRIS systems, payroll, etc. (These services/systems are typically included in the franchise fees upfront, and franchises can acquire them at a discount). As an independent business owner, you’re likely to spent more time and money researching, developing and purchasing these additional necessities.
Because of the vast difference in the cost to launch different types of businesses, understanding your business budget early on is a crucial step in moving forward. If you’re unsure of where to start, we recommend using a pre-qualification tool to determine your maximum project budget, as well as what financing programs you qualify for.
One of the most intimidating factors to overcome as a small business owner is the fear of having an unsuccessful business. Whether you’re funding your venture with debt, retirement funds or cash from family and friends, there is always a risk to your investment.
According to the Bureau of Labor Statistics, about 20 percent of all businesses in the U.S. close after the first two years of operation and a little over 38 percent after four years. However, these numbers vary greatly depending on the type of business you own. It’s generally accepted, because of their established, proven business practices, that franchises have higher success rates than independent businesses, but that comparison is not black and white.
There’s not a lot of information about success rates of franchises, and to predict one brand will be successful while another won’t is extremely difficult. One way to research the risk of a specific franchise brand is to look at their SBA loan default rates. You should also take into consideration how you found the franchise you’re researching. Partnering with an experienced franchise consultant who can help you make a good match is likely to increase your success rate since the brand aligns with your skills and goals. In a five-year study by franchise consulting firm FranNet, performed a five-year study which showed 92 percent of their franchise placements were still in business after two years, and 85 percent after five years.
Though the success rate of independent businesses seems to be more volatile, this isn’t true for all industries. Businesses in the finance, real estate, education and health sectors have almost a 20 percent higher survival rate after the first four years compared to those in the information industry, and a 10 percent higher success rate than retail and transportation industries. Despite the discouraging information you might find after a quick Google search on independent business survival rates, it’s worth putting in the time to research your potential industry before deciding whether you might want additional franchise support. And no matter the industry, if there’s a market for your product or service and you can outdo the competition, your chances of success are astronomically better.
You can also have an impact on the long-term success of your business, whether independent or franchise, based on how you fund your business. Debt-free financing (starting a business without getting a loan) attributes to future success for many businesses by lowering overhead and eliminating monthly payments, allowing the business to become profitable sooner rather than later. Eighty-one percent of Guidant Financial clients who used 401(k) business financing, for example, are still in business after four years since they used money from their existing retirement funds to start their business rather than taking on debt. Over half of Guidant clients who obtained SBA loans also used 401(k) business funding as an alternative to making their loan down payment, thus reducing their monthly payment amount and preserving their personal savings. Managing cash flow is crucial to the success of new businesses, and starting debt-free — or with more manageable payments — has proven to contribute to that success.
David Nilssen is the CEO & Co-founder of Guidant Financial, which helps individuals secure small business funding to start, buy or grow a business with 401(k) business financing, SBA loans and more. Read more tips about finding and financing your business on the Guidant blog at guidantfinancial.com/blog.