Pros and Cons of Buying a Business vs. Investing in a Franchise

To buy a franchise or existing business, that is the question. Sometimes it is a serious dilemma for the businessmen of our time. Despite their similarity, independent business and franchising are fundamentally different from each other. Which of these models is able to provide maximum efficiency and maximum security of investment?

The first thing entrepreneurs usually do is searching for the answer on the Internet. They can read a lot of success stories of young franchisees and franchisors in reputable business magazines. But at the same time, they can read the exciting stories of failures on forums.

There’s nothing terrible in such situation. It is quite normal for the period of development and formation when the weak business dies and the strong and progressive business succeeds. The rules of natural selection apply to business in all their manifestations. Moreover, it should be noted that percentages of failures in business and franchising are approximately equal, as not francises 100% keep their promices.

The purchase of a franchise is comparable to the purchase of a car with an automatic transmission: someone owns a car, it is under his control, he can manage it as he wants to and it’s easier than to use a manual transmission, but at the same time he misses some functionality. As in the case of a franchise, a person can either love or hate automatic transmission.

On the scope of activities, the tastes of entrepreneurs are identical. Comparing the offers, one will see that retail trade and business in the sphere of public catering have great investment attractiveness.

Therefore, the most significant and obvious will be the comparison of objects from these categories.

The fundamental difference between these two business models is revealed in assessing the core functionalities, which will be discussed in this short educational program.

The size of the investment

“The franchise is usually cheaper than a ready business” (Bannister), but not always. The cost of a successful franchise with a world name can exceed several hundred thousand dollars, sometimes approaching the magical amount of one million dollars.

For example, the investment for the purchasing KFC fast food restaurant franchise is more than one million dollars. Purchasing, for example, an Italian lingerie store called Intimissimi franchise will cost the investor more than two hundred and twenty thousand euros, fifty-two thousand euros will serve as a bank guarantee for the proper compliance with all the terms of the contract (“Franchising Intimissimi, Come Aprire Un Franchising Intimissimi”). 

In the ready business, the purchase price depends on the profitability of the enterprise, it can increase considerably in case the business contains some real estate. In general, it is quite difficult to buy a profitable business with only fifty thousand dollars. And franchising provides entrepreneurs such opportunity.

Freedom in business management

Business Freedom

In the case of a franchise, there are certain restrictions within the agreement – compliance with corporate policies and all requirements of the franchisor, mandatory systematic payment of royalties, advertising contributions, etc. Before starting a bulk email validation startup Proofy.io, our founders had and idea of buying a similar business license and scale it. Yet we’ve come to the idea that freedom is more valuable for us, rather than low risks.

If someone chooses to buy ready business, the buyer becomes a full owner and the manager of the company after the purchase. From this moment he does all the planning. The priority costs are defined only by the owner based on his personal considerations, financial capabilities, and plans.

Brand awareness

In the case of the franchise, a well-known name is the advantage of large franchise networks along with customer loyalty. Most small franchisors do not have this benefit, but if a buyer has enough money to buy a famous franchise he can use this bonus for his purposes.

If someone prefers to buy a business, a set of loyal customers formed after the several years of successful work of the business can provide a stable and high profit.

Business risks and security investments

The franchise is ensured through vigilance, professionalism and demands of the franchisor. Under the control of the “guardian”, a designed and tested business model reduces the risks to a minimum. When someone purchases a franchise existing risks are mainly associated with the reputation and respect of the franchisor for his business partners.

The business is achieved through the professionalism and the personal experience of the entrepreneur, also a lot depends on the honesty of the seller.

Traction and profit

The need for systematic payments of royalties in the franchise frightens investors as well as obligations under the contract. But the coin has two sides. It is better to lose a part of the profit than to have nothing.

In business, the owner may ensure the profitability of the enterprise at a certain level on the basis of the experience of previous years, in contrast to the franchise. But there is no way to forget about the influence of owner personality on the business. Many business contacts can be tied to him and after the purchase, they will not go to the buyer.

The listed benefits are not rules, as they never meet all together in one case. This is a theoretical description of the ideal offers. And there is nothing ideal in this world.

But everything that seems simple and straightforward in theory collapses like a house of cards when someone starts considering the specific market offer.

There is one simple rule. Assessing the attractiveness of existing business, one should ask himself whether he can get the same profit investing in a franchise.

The pitfalls of purchasing a franchise

It is important to gather as much information about the franchisor company as possible. How long has it been present in the market, what is its revenue, does it have a positive reputation among customers. All this can be learned by studying reliable sources on the Internet, and also testimonials in social networks and specialized websites.

The buyer should carefully examine the terms of the contract and ask as many questions as possible. The great desire of the representatives of the company to sell a license, combined with the habit to answer questions evasively should be considered alarming. This behavior may indicate several problems. For example, there is a possibility that the company cannot predict the risks, or the sale of the franchise can be only the way to make money, not to start a mutually beneficial cooperation. By signing the agreement, the investor can stay alone with his concerns and solve all problems with no help.

The investor should refer to more experienced people. For example, he can show the cooperation agreement to an independent lawyer, ask friends who have used the services of the company, understand their opinion, try to find contacts of other entrepreneurs who bought a franchise.

The rejection to extend the licensing agreement is one of the most unpleasant moments in the franchise business. The owner may examine the contract, consult with other franchisees and find information about the practice of the franchisor, but it is impossible to protect himself completely. The investor will have to rely on his own instincts.

It is necessary to pay attention to the fact that the cost or the size of the initial investment may depend on the concept of the restaurant or store, but the success and profitability of the business will not.

Conclusion

It is convenient to consider the advantages of franchising and operating a business with specific examples.

The investments in the amount of one hundred thousand dollars will allow becoming the owner of a small restaurant business. For example, it is possible to buy a cafe with a monthly profit in the range of fifteen thousand dollars for one hundred and seventy-five thousand dollars.

The same amount of money can be easily afforded to purchase a successful franchise in the field of catering. As an example the “Big Smoke Burger” franchise. The size of the investment required for its acquisition is one hundred and seventy-five thousand dollars (“Hamburgers Franchises”). As for profitability, performance on it can be obtained, considering the current fast food restaurant franchise. The profit could reach those same fifteen thousand dollars, and the risk will reduce.

That is, the ratio of investment to potential profit in these cases are the same. When discussing a small business worth below two hundred thousand dollars it is quite possible, but the time and efforts can vary significantly. But if there are still some doubts, it is required to analyze the “candidates”. Evaluate the benefits of each choice and compare the final rating.

So to answer the question about what can be obtained buying an existing business, and buying a franchise, it is required to create a grading table.

 

Business Franchise
Investments + +
Freedom of business management +
Brand awareness +
Risks +
Income stability +
Result 3 3

 

Regarding the freedom of actions, independent business, of course, wins. But at the same time, the new owner will not be able to count on someone’s support or advice.

Brand awareness plays into the hands of the franchise since the “Big Smoke Burger” brand is quite famous and popular in the market. 

The popularity of the single cafe, as a rule, extends no further than its location area. So franchise can easily surpass the profitability of a cafe, even if they are nearby, due to a known name.

Business risks are often higher when starting a business from scratch, rather than opening a franchise office. The business model that has already proved its viability can count on realistic profits, not theoretical. Obviously, buying a McDonald’s franchise is pretty costly, yet the risks are much lower.

“Competitors” are equal within the given framework. And the decision, as always, is up to you.

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