When entering into a new venture, you are presented with two options:
join a pre-existing franchise chain
establish a new business venture independently
As a franchisee, you will be working with a pre-established business and will act as a distributor of that business under its trade name and business system. A new business is an independent entity and has complete autonomy over its system and brand.
When considering which venture to pursue, various factors can influence your decision.
Establishment and Costs
A franchise is just an extension of the main brand and therefore is part of a pre-existing and functioning system with all the advantages of having a pre established market, supply and distribution chains, and brand awareness.
The cost of establishment usually involves a set number of fee obligations which cover franchising fees, advertisement and marketing fees, and other fees related to maintenance and functioning.
Generally, franchises have a lower cost of establishment and maintenance than new businesses. This is due to the large cost of installation, purchasing of infrastructure and other investments to gain market awareness and a consumer base.
Franchises benefit from collective bargaining and also have better supplier relations, which new business may find hard to establish.
Profit and Success
Due to the pre-existing brand awareness and consumer base as well as the lesser costs of initial investments, franchises have a faster inception into the market and generate profits faster than new business usually can.
The extensive effort and costs required to establish a businesses’ market base and maintain its functioning often result in delayed profit generation and since the margins are so close, sustained profitability often takes a considerable amount of investment.
Franchises benefit due to having a proven business model and provides a framework and benchmarks for performance and strategy by considering existing franchises and their performance. However, franchises have an upfront cost of buying the right to distribute and can sometimes demand a greater cash obligation than new business.
Success Rate and Other Factors
On average, franchises perform better than new businesses and have a longer market lifespan.
According to market research, more than 80% of franchises operate for at least a period of 5 years, whereas, more than half of new independent ventures fail or have to cease operations by that time frame.
This is due to a number of factors, some already mentioned. The most apparent reason is the high costs and uncertainty of maintaining a customer base.
However, new businesses have unlimited potential to grow and expand, while a franchise is limited by constraints and does not have room to develop beyond what the parent brand may be willing to accommodate.
Therefore, individuals that do not have a high tolerance for accommodation and supervision look to establish independent ventures as this provides them with complete autonomy and decision-making power.
Also, entrepreneurs with high levels of creativity may not want to work under a franchisor as they do not have any authority to implement ideas and have to follow the guidelines and policies of the parent company without any objections. This limits the development of individual units.
The Right Choice For You
Each entrepreneur has different approaches and attitudes towards risk and authority.
For many individuals buying into an existing system, that also requires less investment of time and money to sustain and manage, provides them with a greater sense of security and convenience than those involved in establishing independent ventures.
On the other hand, the complete autonomy and room for unrestrained development and growth of the business can be more attractive to individuals that have a higher degree of risk tolerance and want a higher degree of involvement.
Both avenues provide comparable returns and have facets that are attractive and challenging to entrepreneurs.
Ultimately, it is the choice of the individual as to what system they want to follow and implement, and these choices should be made after considering all factors involved and detailed market research.
The preceding content is for informational purposes only and does not constitute legal or professional advice. To obtain such advice, please contact our offices directly.