Franchise vs. New Business

In deciding between purchasing a franchise and starting a new business, perhaps the best place to begin is to ask yourself why you want to own a business. The answer you give may provide some insight into which path you should choose.

You want to be your own boss. If your answer is that you want to own your own business because of the freedom it will bring you, you probably shouldn't buy a franchise. If you buy a franchise, the franchisor will dictate much of what you have to do, when you do it, and how you do it. You'll have far more control if you start your own business.

You have a business idea that you believe has a lot of promise. If you want to nurture an idea you have into full bloom, you probably shouldn't buy a franchise. You won't have much control or be given much of an opportunity to pursue your ideas (try telling McDonald's that their golden arches ought to be bright green). You may be better off starting your own business.

You want to make lots of money. If your answer is that you want to own your own business because of the financial opportunities it presents, you should look long and hard at a franchise. Franchises don't necessarily make more money than other types of businesses, but they do have higher success rates. Of course, you'll be paying for the higher success rate in the fees you'll be paying to the franchisor. You should look particularly hard at franchises if you don't have a great deal of hands-on experience running a business.

Warning A lot of people in the franchising field will tell you that franchises have a failure rate of about five percent, compared to the 30 to 50 percent failure rate of independent entrepreneurs. You should be aware, however, that some studies have questioned the five percent rate. For example, a study by Dr. Timothy Bates, a professor at Wayne State University in Detroit, found that the franchise failure rate actually exceeded 30 percent and that franchises made lower profits than independent entrepreneurs. Dr. Bates' study also found that the average capital investment of franchisees was $500,000, compared to $100,000 for independent entrepreneurs. In addition, note that the failure rate for franchises varies significantly by type of business. It pays to do some research into the particular segment of the franchise industry that you're considering to buy

You have money but you're looking for something to keep you busy. If you have startup funds in hand, a franchise may be ideal for you, particularly if you lack hands-on experience. You'll get help with everything you need to set up your business: site selection, inventories, management counseling, hiring practices, and every other necessary function for the operation of your business.

Did You Know? Did you know that franchises are particularly popular among downsized business executives and early retirees because they fit the ideal franchise profile? They often have startup money in hand but little experience in the industry.