Franchise Or Start-Up? Weigh the Risks

Kevin Bugeja, Managing Director, Franchise Selection

For the most part, we all want to work for ourselves, but is owning a business all it’s cracked up to be? We all have different ideas about what success means, but the one thing that can’t be denied is that working for someone else may NOT be enough to achieve your dreams.

It’s no secret that the wealthy in this world have one thing in common. They own their own business and therefore control their own destiny. The real question is not determining whether owning a business is the right move, but whether you should choose a franchise operation or a traditional business.

Before deciding to purchase a franchise or start a business, first let’s review eight main characteristics you should address before going forward. If you know where you stand in relation to these traits, you will have a much clearer picture of the type of business that will work for you. So let’s get going!

1. Your aversion to risk - One of the biggest factors to consider before buying a business is knowing how much risk you are willing to take with a new business. In traditional business, you can win big but you can also lose big, too. The wealthiest people today aren’t franchise owners. They are business owners who may have franchises as part of their model.

The risk associated with owning a franchise is predictable and usually much lower than a standard business. On the flip side, if you have visions of making it big with a franchise, the reality is you’re going to have to own multiple operations to make that happen.

2. Your creativity, or lack thereof -Running a traditional business requires you to wear a lot of hats. You have to be knowledgeable in marketing, operations, sales, inventory, human resources and so on. Creativity is important as small business owners need to resolve issues without the resources available in large corporations. However, with a franchise, the franchisor usually makes most of the decisions regarding marketing, systems, solutions, etc. If you are an independent and creative person who wants the freedom to try new things, then a franchise might not be for you. If you like more of a turn-key approach where you don’t have to solve all the problems, then go with a franchise.

3. Your comfort level with planning -One of the most common areas in which entrepreneurs fail is planning or failing to plan. Too often people start a business without a business or marketing plan. They open their doors and hope they won’t make too many mistakes. In a traditional business model, that’s the ‘kiss of death’.

With a franchise, most of the planning, if not all of it, is already mapped out for you. They have all the systems in place. All you have to do is follow the directions. Franchises work because of their systems. So if you know you don’t plan enough, then maybe a franchise is the right move for you.

4. Being informed - Quite often, first-time franchise owners dive into buying a franchise without any knowledge of franchise relationships. They don’t understand the viability of the industry they are choosing, they don’t conduct enough research on the company and they don’t understand the legal consequences of the contract they are signing. Potential franchisees should have full knowledge of the above as well as the core values of the franchise and the franchisor.

5. Consider the latest trends - You don’t want to invest in a fad, but you do want to invest in a franchise that’s current and relevant. Research what consumers want and need and take a look at what products or services are lacking in your community. Once you have chosen an industry, try to select companies that will have territories available in your desired area. Buying a franchise allows you to utilise the expertise of a current system to fast track your success, rather than starting from scratch.

6. Don’t rush and choose wisely - It’s so important to do your due diligence before you make the decision to buy a franchise or start your own business. You must know how much you have to invest, what are your strengths regarding running a business and what are your long-term goals?

7. Moving forward with your purchase - When you make the decision to ‘move forward’ and buy a franchise or start your own business, your natural reaction will be to get going NOW. I totally understand. The reason you want to be an entrepreneur is because you can make the decisions and nobody tells you what to do. Instead, proceed carefully, as mistakes will occur during this crucial time period. It’s so important to slow down, take a deep breath and resist the natural urge to charge forward.

8. Consult with experts - Signing on the dotted line and making an agreement with the franchisor is serious business. Consult with a franchise expert first to see if owing a franchise is really the right decision for you. This can help you avoid disappointment, confusion, business failure and expensive litigation down the road. It’s also a good idea to consult with an accountant familiar with franchises to understand all the tax and legal obligations as well as advantages involved.

Starting your own business

The majority of people who plan to start their own business or become part of a franchise, do so because they want to be the boss. They want to control their future and their success. It’s a great feeling to have that autonomy and freedom of making the business decisions. It’s also very rewarding.

If you have the financial capacity to fund a start up and the confidence to manage a company, starting your own business can be the way to go. Even if you start your own company in the evenings and on weekends, while keeping your day job until it’s up and running, being your own boss is a powerful draw.

But there is a higher failure rate among new business ventures than among franchises. There is no franchise support, no franchise community to ask for advice and it’s often more difficult to get financing for a company that doesn’t already have a track record. There are also no economies of scale in terms of purchasing power and negotiating real estate, no brand recognition and higher costs for things like advertising and design – costs that are shared in a franchise system.

Purchasing a franchise

Perhaps the biggest perceived drawbacks to purchasing a franchise are royalties and other fees paid to the franchisor. The trade off is that many of the struggles of starting your own business are mitigated or eliminated. With a franchise system you receive franchise support, purchasing power, shared research and development costs, real estate and legal help, construction assistance and a proven model with instant brand awareness. A franchise fee and royalty payment (usually a percentage of what you have made) are often a small price to pay compared to the ‘tuition’ charged by the ‘School of Hard Knocks’.

Franchises charge a fee for a reason. They have been through the pains and financial penalites of developing products, systems, and a brand image. They have tried and tested the business model. They have brand recognition and experience. Consequently, the failure rate for franchise systems is lower than most new businesses.

It should also be noted that not everyone fits into the mold of being a franchisee. For some, the thought of being accountable for the rules and systems required by the franchisor is too constraining. Again, it’s up to you to weigh your aversion to risk with your need for autonomy.

Things to consider no matter which you choose

Consider what it really means to be your own boss. Being the boss of a start up, whether it’s your own or a franchise, also means that you’re in charge of everything. This is a substantial responsibility.

Being the boss means leveraging your savings, sometimes even your equity, all for the privilege of sleepless nights worrying about payroll and outstanding bills. For many, these arguments are a strong reason to continue working for someone else.

But for thousands of Australians every year, living their dream of starting something from the ground up, even if someone else helps to point the way, is too big of a pull. Conducting research, asking the right questions of the right people, seeking expert advice and knowing some of the hidden risks ahead of time help to make sure your final decision is the right one.

Kevin has been involved in franchising for over 18 years. He has been a franchisee and franchisor. His exposure to franchising started with banking in NAB, then as a recruitment consultant for one of Australia’s most successful franchise development companies.

In 2006 Kevin founded Franchise Selection, a specialist recruitment firm that specialises in recruiting franchisees. Today his company now assists more than 20 small to large franchise organisations throughout Australia and overseas.

Contact Kevin at:

Ph: 1300 FRANCHISE (372 624)
0412 511 630