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Should you buy a franchise or start your own business?
As a small business owner, you face a large number of choices about how to start and run your business. One of the first questions you need to tackle is deciding whether you should buy a franchise or start your own business. There are pros and cons to each, and the choice is ultimately based on your skills and comfort levels.
Franchising vs. Starting Your Own Business
A franchise is a small business model where you pay a parent company a franchise fee as well as ongoing royalties to operate within their company. As an owner, you benefit from the company's reputation and advertising, while also receiving ongoing training to open and grow your franchise location.
From education to gardening to home remodeling, there's a franchise for almost anything. Buying a retail business can be very exciting, as many owners are able find a business that matches their skills. Franchise costs vary widely, so be sure to research what financial obligations you will need to cover to start the business.
Starting your own business, on the other hand, gives you maximum flexibility, both in terms of what work you do and how much you invest to start. Many small business owners start their companies on the side while they work a full time job, and make ?the leap? to full time work in the business later.
Franchise Advantages and Disadvantages
- It can be easier to get a loan to purchase a franchise than it is to get financing to start a business from scratch. Bankers appreciate the proven model and are familiar with the financial risks of franchises.
- A franchise with a solid history gives you a lower risk enterprise than a new untested business idea. While franchises can, and do, fail, the risk is lower because of the proven business model.
- As a franchise owner, you're not responsible for all of the advertising. Most national franchises have well established brands and national advertising campaigns that make it easier for a new owner to stand out in their community.
- If you do well with a franchise, there's always a possibility to expand and buy more of the business, either in your city or in other areas.
- Ongoing fees and royalties can become frustrating over time, especially if you feel that you are creating most of your own success.
- Being a franchise owner can feel a lot like working for a boss, which can be frustrating to entrepreneurs looking for professional freedom.
- Legally, you sign a contract to stick with your location for a specific amount of time when you buy a franchise. That means that even if it fails or you're ready to move on, you may have to wait until the contract expires.
- Many franchise owners work very long hours, particularly if they struggle to hire reliable employees. Many types of franchises, especially fast food, have high employee turnover rates.
Advantages and Disadvantages to Your Own Company
- Being your own owner and boss gives you the maximum amount of creative freedom. If this is important to you, you likely want to start your own company.
- With full ownership, you gain the full reward of the company's success. You won't have to pay fees or royalties to another owner.
- When you own your own company, you can choose the form of business you prefer, and have the option to pass the company to your heirs if you choose.
- Having your own business keeps you free from the political and news-related scandals that can often affect franchises. With your own company, you don't have any public relations baggage.
- When you own your own company, the entire financial risk rests with you. This can affect your family, your retirement, and more if things go poorly.
- Finding financing for a new venture can be very difficult. As a result, new business owners sometimes need to ?bootstrap?, or self-fund, their company in the beginning.
- Because you handle the whole business, you have to learn to do everything. You will be setting up processes for your company from scratch. This can be very time consuming.
- Building your brand and getting noticed can be difficult for a new company with no brand image or national advertising.
How to Decide Which is Best for You
By asking yourself some questions and reviewing your motivation for starting a business, you should be able to determine whether it's better for you to buy a franchise or go it alone. Review the franchise pros and cons above and see which sounds best. Ask yourself if you're willing to give up part of your profits to a parent company in return for having a proven business model.
Think about what business or industry you want to be in and research what opportunities are available. If you're still uncertain, consider going to a franchise trade show to see what's out there and how to start a franchise business. Once you're aware of all of your options, you'll be able to weigh your own personal pros and cons as they related to starting a franchise, and make an informed decision.
Many times, small business owners in retail businesses find the flexibility of an LLC to be helpful in their operations. They enjoy the protection of personal assets they gain from an LLC, as well as the ease of having the taxation pass through onto their personal tax return. However, depending on your company size or needs, you may find other entities helpful. You will want to compare the different options to determine what's best for you.
A franchisor is the company that controls or owns the right to allow potential franchisees to start a business under the respective franchise corporation. Likewise, the franchisee is the individual or entity granted permission to conduct business under the franchise. The franchisee normally pays the franchisor fees and royalties in return for the opportunity to operate under the franchise business.
A business plan is essential for obtaining financing from banks or investors, because they need to know what your plans are and how and when you plan to be profitable. However, they are also helpful for you and your management team. A business plan can function as a high-level strategy to keep everyone moving forward and on the same page. As a result, even businesses who are not immediately seeking funding often create a business plan.
If your company is an LLC or corporation formed in one state, you will be able to file paperwork to "qualify to do business" in other states. In general, each state will require your company to register, pay annual fees to the state, and provide annual reports. In addition, you may be required to get business licenses in each locality where you operate. The business license division in each city will be able to give you the information you need on local requirements.
As an employer, it's important to be aware of the state and federal laws that affect employer/employee relationships. These can be as simple as requirements to display certain regulations in your store or as complex as how to go about letting an employee go. There are multiple factors that determine what laws apply to your business, including location, number of staff, and annual revenue. In addition, state laws will also apply. Do careful research into the regulations surrounding hiring, firing, and employment for companies of your size and location.
Operating in your home state is usually the most cost effective, but Delaware has advantages that other states do not when it comes to business. Delaware's general corporate law is said to be the most advanced and flexible for business formation in the whole country. As a result, more than half of all publicly traded U.S. companies call Delaware home for their businesses.
As a retail business owner, small business owner, or franchisee, you know how important it is to meet the needs of your customers. incorporate.com recognizes those efforts and offers products and services to help you grow. From finding permits to getting your Employer Identification Number (EIN), we allow you to save time and focus on what you really enjoy – your business!
For a full list of products and services offered by incorporate.com, check out Our Services. We'd like to offer the following services in particular to your retail, franchise, or other small business.
- Incorporate or Form an LLC
- Business Licenses & Permits
- Employer Identification Number (EIN)
- Doing Business As (DBA) Names
- Trademark Services
- Corporate & LLC Compliance Kits
- Bylaws & Operating Agreements
- The International Franchise Association (IFA), the premier trade association for franchising, provides franchise information, requirements, education and events as well as resources for both franchisors and franchisees.
- The FTC?s website offers a detailed guide to choosing a franchise.
- Franchise Direct offers a directory of franchises plus information about franchise events and trade shows.
- Franchise.com is a franchise recruitment website where you can learn about and search for franchises and events in the industry.
- FranNet is a franchise consulting firm that matches people with franchise opportunities.
- Franchise Foundry is a franchise development company focused on helping franchise startups succeed.
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