Looking to become a business owner without starting from scratch? Trying to decide whether to purchase a traditional, independent business or pursue ownership of a franchise? Both are great ways to become your own boss without having to reinvent the wheel. Each has advantages and disadvantages. Before you begin searching for a particular business to pursue, it’s good to know the distinction between these two types of opportunities. That way you can determine how well each fits with your goals and preferences.
Traditional Business
Buyer/Seller Relationship. When you buy a traditional, independent business, you own it outright. Usually the buyer/seller relationship ends once the transaction is complete. It may feel freeing to avoid ongoing royalty payments and run the business entirely as you choose. But keep in mind that the seller will have no vested interest in your success and little reason to offer ongoing support or help.
Government regulation and protections. Federal law does not require the seller of a traditional (non-franchised) business to make any particular disclosures prior to the sale. (Some states will encourage a general form of disclosure.) This lack of regulation can make for a quick purchase process. But it does leave you solely responsible for thoroughly investigating the business.
Financial considerations. The purchase of a traditional business usually requires a lower overall investment than the purchase of a franchised business. The corresponding income potential, however, may also be lower. Buying an independent business may not require costly leasehold improvements or large working capital reserves, making it an option for many people who may not have the capital available to purchase a franchise.
Franchised Business
Buyer/seller relationship. When you purchase a franchise, the buyer/seller relationship is important throughout the duration of your ownership. In exchange for an upfront fee and ongoing royalties, the franchisor provides you with access to a brand, a proven business model, comprehensive training, and ongoing support. However, to protect the brand name, the franchisor will require you to adhere to strict guidelines in operating the business. Maintaining brand standards benefits all franchisees in the system by ensuring the product or service is uniform and consistent from store to store.
Government regulations and protections. The Federal Trade Commission (FTC) requires franchisors to make certain disclosures prior to finalizing a sale. The required Franchise Disclosure Document (FDD) will help you undertake due diligence (investigating the details of a potential investment and verifying material facts) before you buy the franchise. Many individual states specify additional requirements a franchisor must comply with in order to sell franchises in that state.
The FDD is of enormous value. It provides you with critical information and can help you evaluate the degree of risk involved. Franchisors must disclose any litigation they have faced, list all of the franchisees in the system, and address turnover and terminations. Although not required, the FDD may also specify the earning potential of a franchise.
Which works for you?
Deciding which type of opportunity suits you usually requires some reflection and self-assessment. Are you entrepreneurial and ready to begin your entrepreneurial journey? Do you want to own your own business, with complete control over decision making, or would you prefer the structured approach of a franchise business that follows a proven business model?
Some traditional business owners enjoy being an independent business owner, building an independent startup with complete creative control and flexibility. Running an independent business allows you to be your own boss, create your own business concept, and adapt to market trends as you see fit. However, launching a traditional startup or new business often requires significant market research, handling startup costs, and managing a steep learning curve without a built-in support network or established systems.
On the other hand, many prospective franchisees and first-time business owners are drawn to the advantages of franchising. A franchise system offers brand recognition, ongoing support, and marketing support from the start. Franchise owners often follow the franchisor’s guidelines, benefit from operational processes, operational procedures, and comprehensive training, and can rely on a franchise network for peer-to-peer learning. Franchise owners benefit from a recognized brand, a built-in brand recognition, and an existing customer base that reduces the risk tolerance compared to going out on their own.
Of course, franchise ownership comes with responsibilities. A franchise agreement typically requires franchise fees, a higher initial investment, and ongoing royalty payments. Owners may need to pay royalty fees or pay ongoing royalties as part of the cost of aligning with the franchisor’s brand and benefiting from the franchise opportunities available. Still, many franchisees succeed by leveraging the proven track record and sustainable growth potential that comes with an established brand.
For business owners considering franchise vs traditional business, the key is to balance personal preferences, risk tolerance, and your desired decision making style. If you want creative freedom and complete control, a traditional business or independent business may be the right fit. But if you’re looking for a franchise compared to an independent startup, and prefer the support of franchise consultants, marketing efforts, franchise location opportunities, and an existing business model, then franchise ownership may offer the smoother path.
Take the time to define your goals, evaluate gross sales potential, calculate ongoing expenses, and develop a clear business plan. Whether you choose franchise versus traditional business ownership, aligning with franchisor’s guidelines or pursuing complete control in a traditional business, the right decision will help ensure sustainable growth and a successful business that fits your target market and lifestyle.