Franchise or Traditional Business Opportunity: Which Path to Choose?

two directions

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? Do you need control of every detail, large and small? Might you feel limited by a franchise arrangement? Would you prefer a traditional business where you can make all the decisions?

On the other hand, would you find it appealing to begin with instant brand recognition, ongoing assistance, and a company-wide marketing program? Many first-time business owners find that franchising offers significant advantages over a traditional business opportunity. The franchisor is invested in continually refining their product or service and building the brand. They make adjustments to reflect changes in the marketplace and advances in technology, and may provide new products, upgraded equipment, and additional training as needed. Franchisees benefit from a built-in peer network: they can easily learn from and compare notes with each other.

Take the time to define what you’re looking for and weigh the pros and cons of each type of business opportunity before you get too far into investigating particular companies. Assessing which path suits you best at the beginning will save you headaches later.