When buying a franchise, you can enter into a franchise agreement with a franchisor and start a business as a franchisee or you can purchase an on-going business that is a franchise. You would still enter into a franchise agreement with a franchisor but would have a business with a financial history and customers, etc.
Buying a franchise is a personal decision, and there are advantages and disadvantages. The most common advantage I’ve heard is the security. You are usually buying name recognition, which attracts customers; and you have the franchisor available to guide you. If you are starting a franchise business, the franchisor will do a marketing survey to determine the best location. Many times the franchisor will purchase the real estate and lease it to you. This helps you get started, as you don’t have to tie up so much capital in the location and can concentrate on building up the business. Franchisors usually have requirements for the size, style and decorations of the franchise. You will notice that most franchise locations look exactly the same and sell identical items.
If you are starting a business that is not a franchise, you are taking a greater risk, as all costs and plans are your total responsibility. Of course, the franchisor makes money from you as long as you have the business by charging franchise fees. These fees vary according to the franchise. If you buy an ongoing franchise, the above will be the same except you will be buying the cash flow, as you would whether or not the business is a franchise. When the purchase transaction closes, you will immediately start making money from sales instead of starting to build your customer base.
Obtaining financing for the purchase of a franchise is usually easier than obtaining financing for an independent business, either due to your chosen franchise’s success rates or lender partnerships through the franchise itself. Preparing a thorough business plan is important before applying for a loan. That is sometimes easier with the help of the franchisor and taking advantage of that expertise.
Expansion is also a factor when considering a franchise, since franchising makes owning a second or third location a much easier process than opening a second independent business location.
If you like things structured and like to have someone make your plans or assist you, a franchise would probably be a good choice for you. You will have the support of a group of people. You will also have brand awareness and some general advertising by the franchisor. Of course, you will be required to keep accurate records and send reports to the franchisor, along with franchise fees and advertising fees.
Whether you purchase a franchise agreement and start a business or purchase an ongoing franchise business, you must be approved by the franchisor. Your financial statements will be required, along with personal and business history. The purchase price of a franchise varies with the franchise, and that amount will become an asset of the business. If you purchase an on-going franchise, that will be part of the assets you are purchasing. You will also pay fees to the franchisor each month, according to the amount of your sales. This will be a percentage of sales, and that percentage varies depending on the franchise.
Comparing owning a franchise business or an independent business, you will have complete control with an independent business; but you will have a bigger investment of time, as all decisions will be made by you. You will have more profitability owning an independent business, as you do not pay fees to a franchisor each month. You can also make changes in the products and the selling prices whenever you choose. An advantage of the franchise, however, is that you have a group of experts continually looking for ways to improve your business.
Starting your own business will require more time, talent, and dedication than any other job you can have. While it requires an investment of both your money and yourself, the risk can definitely pay off, emotionally and financially. Investing in a franchise, however, can also diminish any potential downsides of branching out on your own. It is a personal decision only you can make. If you are more comfortable with the structure provided by a franchisor, you will likely find the fees a small price to pay.
