Deciding whether to buy a franchise or start an independent business requires consideration of a variety of legal, financial and practical considerations. While many people find success as franchisees, a significant percentage of franchisees fail. Of course, many independent businesses fail as well. In fact, according to the Small Business Administration (SBA), failure rates of franchised outlets and independent businesses are roughly equal.
When trying to decide between buying a franchise and starting an independent business, here are some important considerations to keep in mind:
1. What is your business background?
If you start an independent business you will, by definition, be on your own. Unless you have a natural business acumen, without a significant business background, you may struggle to find success independently. This is especially true with a brick-and-mortar business such as a convenience store, which requires you to lease retail space, hire employees, and maintain a sizeable inventory.
However, you need business savvy to operate a successful franchise as well. Even when you are propped up by an established business model and have a real-world-tested system for running your business (all franchises should offer this, but not all of them actually do), you still need to make the day-to-day decisions. If you don’t know how to run a business, you are likely to struggle regardless of whether you choose to operate independently or as a franchisee.
2. What does the market demand?
For certain types of businesses, operating under a franchised brand can offer a significant advantage. When you drive around, do you see more franchised fast food chains (such as McDonalds and Dunkin Donuts) or independent restaurants? Do you see more big-name convenience stores (such as Walgreens and CVS), or more mom-and-pop ones?
The location where you will operate and the type of business you intend to open could both be significant factors in your choice between franchised and independently-owned. Buying into a big-name franchise can provide instant trust and recognition. But, offering a local feel can provide competing benefits under the right circumstances as well.
3. What are your financing options?
In some instances, it can be easier to obtain financing to purchase a franchise, particularly if (i) you are new to owning a business, and (ii) a significant initial investment is required. The SBA offers special financing opportunities for franchisees, and some franchisors offer financing as well (though, of course, you should always have any financing documents reviewed by an attorney). But, if you have a strong business plan and you believe you can be more profitable operating independently, then maybe staying away from franchising is the way to go.
4. Are you prepared to be a franchisee?
Finally, while buying into a strong franchise system can provide valuable benefits, these benefits come at a cost. As a franchisee, you are not independent, and you do not have absolute control to run your business as you see fit. If your franchisor says you need to use a particular vendor or point-of-sale system, will you be willing to comply? When your initial franchise term is over, will you be able to renew? What are your options (if any) if your franchise is unsuccessful? These are just a few of the numerous questions you will need to answer in order to make an informed decision.
Starting any type of business is a complex investment with many legal implications. Before opening an independent business or purchasing a franchise, you should discuss the legal risks with an experienced attorney.
