There are many approaches for aspiring entrepreneurs who dream of entering the complex world of business, but there are various ways nowadays that you can pursue a career path in entrepreneurship. This article will take a deep dive into two common routes, which are buying a franchise or building an entirely new venture during the startup stage. Both can provide opportunities to create a profitable business, but they involve very different approaches to ownership, risk, control and growth.
A franchise is a business that you invest into with initial fees paid to a franchisor to trade under a business with an already established brand identity within its market. You will also gain access to operational guidelines and support as well as an established model of the third party who is the original business founder referred to as the franchisor. In return for fees and ongoing payments where applicable, the franchisee typically receives access to an established business framework, training and support.
A startup, by contrast, is a new business created independently by an entrepreneur or founding team. The founders develop the product or service, brand, operating model and customer base themselves.
Neither of these approaches are automatically ideal for you. The appropriate decision depends on numerous components, such as available investment capital, previous business experience, risk tolerance, desired level of business control and freedom, as well as your long-term business aims.
1. Initial Costs
Traditionally, all franchises will start with a relatively low entry fee, otherwise known as an initial franchise fee, but there are other hefty costs other than this initial to note, such as costs for premises, equipment, inventory, technology, insurance, training and working capital. Depending on which franchise you decide to pursue, some franchisors may even have specific requirements for new franchisees or even particular qualifications to run the business depending on which franchise niche you are interested in making an investment into. If you would like to learn more about franchising and how franchises work, there are plenty of websites out there that provide information around all of these topics, such as UK Franchise Opportunities.
On the other hand, if you choose to pursue a startup, you need to also note that costs vary considerably depending on the industry and business model. They can include product or service development, technology, branding, hiring, professional services, marketing and working capital. A technology startup, for example, may have significant development costs, while a service-based business could require comparatively less initial investment.
Importantly, neither model has a universal cost. Industry, location, scale and business model can substantially affect the capital required.
2. Brand & Market Entry
One of the main appeals of franchising is that it will give a new franchisee the chance to enter a highly competitive market with the support of trading under an established brand, tried and tested business model and access to useful marketing materials and channels you may struggle to get access to when launching your own venture independently. Depending on the franchise you decide to invest in, customers may already recognise the brand, while established marketing materials and processes can provide a framework for entering the local market.
With a startup, the entrepreneur generally begins without an established customer base. The founders must develop the brand, establish market positioning and communicate why customers should choose their product or service.
This can require significant experimentation, particularly when the business is introducing something unfamiliar to the market.
3. Control & Independence
Franchisees generally operate within systems and standards established by the franchisor. These may cover branding, products, pricing policies, suppliers, customer service, premises and marketing. Franchise agreements can also contain requirements relating to territories, operating procedures and other aspects of the business.
A startup typically gives founders greater control over strategic and operational decisions. They can determine the product offering, branding, pricing, marketing strategy and business processes, subject to applicable laws, regulations and market conditions.
Greater independence, however, also means greater responsibility. Startup founders must make decisions about areas that a franchise system may already have addressed.
4. Business Risk
Although franchise businesses are known to have higher success rates than compared to independent startups, it is important to remember that they are not risk-free nor is any path to business. The performance of a particular location can also be affected by local competition, demand and economic conditions.
Startups face different uncertainties. These can include whether the product or service achieves product-market fit, how much it costs to acquire customers, competitive pressure, execution challenges and uncertain demand.
Neither model eliminates business risk. An established brand does not guarantee the success of an individual franchise location, while an innovative startup does not necessarily translate into commercial demand.
5. Support & Resources
Franchising can provide entrepreneurs with resources that would otherwise take time and money to develop. Depending on the agreement, these may include initial training, operational procedures, marketing support, supplier relationships, technology and established business processes.
Startup founders generally need to build these capabilities themselves or obtain them through employees, consultants, technology providers or business partners.
This difference can be particularly relevant for people with limited experience in areas such as operations, marketing or business administration.
6. The Potential Growth & Scalability Of Each Venture
When you invest into a franchise model, there are many exciting opportunities for potential growth of the business. For example, if you invest in a particular franchise and find you are successful within your current location, you may want to expand by opening multiple territories trading under the same brand, but in multiple areas, this would allow you to become a multi-unit franchisee within that business entity.
Startup growth can take several forms, including entering new markets, developing additional products, expanding distribution, using technology to serve more customers or raising external investment.
The fundamental distinction is often between replicating an established model and creating and scaling a new model. A franchise generally provides a framework to replicate, while a startup may need to develop and refine its model as it grows.
7. Profitability & Economics
While franchisees may acquire customers quicker than independent businesses upon opening as they are trading under a strong brand identity, it is important to remember that with a franchise investment you will also have many costs to bear such as marketing and ongoing franchise royalty expenditures, which will be from your franchise location’s revenue. These fees are typically calculated by a percentage commonly ranging from 2-10% depending on your chosen franchise of your store’s sales and these fees either have to be paid monthly or quarterly depending on your franchise contract. They also need to account for expenses such as staff, premises, inventory and local marketing.
Startups typically allow business owners to have greater control of their product pricing, cost structure and reinvestment strategies to expand upon the business. However, early-stage businesses may need to invest heavily in product development, customer acquisition, technology or hiring before reaching sustainable profitability.
Revenue potential, margins and the time required to reach profitability can vary substantially in both models. Neither structure guarantees a particular financial return.
8. Who Might Consider Each Model?
A franchise may be a great opportunity for an entrepreneur who has a lower risk tolerance and is happy to follow an already-established proven framework for business success, even if this limits their entrepreneurial creativity and freedom.
This type of business opportunity is also an attractive path to entrepreneurship for people with limited business experience who would benefit greatly from support, particularly where the franchisor provides meaningful training and operational guidance to avoid you feeling alone in the complicated business world.
A startup is often the perfect opportunity for an entrepreneur who values greater operational freedom and creativity as well as someone who likes the idea of building a brand from scratch that customers can rely on. It can also suit someone with a differentiated idea, product or technology who wants to develop a new business model around it.
Ultimately, the choice depends on the entrepreneur’s circumstances, objectives and willingness to take responsibility for different aspects of building and operating a business.
Which Model Would Be The Ideal Choice For You?
The choice between pursuing a franchise opportunity or startup business venture ultimately involves counterbalancing operational structure with creative freedom, established operational procedures with experimentation, and anticipated processes with the uncertainty of establishing a new brand within your chosen market. Each aspiring entrepreneur should evaluate the specific business opportunity, investment requirement, contractual obligations, market demand, operating model and their own personal ambitions in the world of business before making a decision.
Also read: Starting Your Entrepreneurial Journey By Buying a Franchise
