There are many opportunities for entrepreneurs in this country, both for starting a business and for taking over an existing one. Both offer the prospect of making a small fortune, but itâ€™s hard to tell which is the safer and more profitable venture. If youâ€™re torn between starting your own business or buying into an existing franchise, some comparative information may help.
These factors vary greatly. According to an infographic from QuickBooks, the average startup cost of a new business is about $10,000, which is less than most Americans pay for a car. However, a franchise is starkly different. You could pay between $500,000 and $1 million to get a franchise up and running, which includes the cost of purchasing property, building a new location, furnishing the building, inventory stocking, legal fees, and more.
There are many additional fees that often come with a franchise, such as royalties. However, these fees are comparable to the unexpected expenses that arise with a typical business.
Itâ€™s also important to note that the cost of a franchise varies greatly, primarily depending on what franchise you purchase. For example, you can buy a Subway franchise from an existing storefront for just $15,000. If you were starting from scratch, youâ€™d be looking at closer to $250,000. When compared to the revenues Subway regularly collects, this is an easy fee.
One of the most important considerations to make is the difference in crowds and loyal supporters for franchises vs. businesses. Because they love things that are familiar, people are often more willing to make purchases from a franchise where they recognize the prices and services than they are from a startup where prices tend to be higher and the service is foreign.
For example, 7-Eleven, which is one of the most recognizable chain stores in the United States and is present in 18 countries with more than 56,000 operating franchises, is much more likely to receive loyal visitors. When parked across the street from a lesser-known gas station and convenience store, people will usually choose the 7-Eleven.
There are also stark differences in legal restrictions. Both are required to comply with federal and state laws and regulations, but franchises tend to have more complex legal disclosures than small businesses. The requirements for franchises are very strict and usually center on a document called the Uniform Franchise Offering Circular (UFOC). Itâ€™s a document about the company, opportunities, financial statements, and other information that must be meticulously adhered to. Itâ€™s almost impossible to do this without a good franchise attorney.
Businesses usually have far fewer fees and hoops to jump through. Once youâ€™ve registered your business and drawn up a few contracts, the legalities are basically over. Many startups are able to do it all without a lawyer.
Statistics show that startups face a much higher risk of failure than franchises. About 90 percent of franchises see success in terms of profits and years running while 80-90 percent of startup businesses fail within the first five years. This isnâ€™t to say that franchises are entirely risk-free, but itâ€™s pretty clear that success is more common for franchise entrepreneurs.
For that reason, many people are willing to pay the higher fees and pore over the legal documents to start a franchise. The promise of high profits and long-term success is too great to pass up in that light.
Final Takeaway Message
Itâ€™s important to note that the information in this article is a level of speculation based on past trends. Itâ€™s data from the experiences of those who have gone before, but there are always outliers and factors that affect the outcome of these trends. Itâ€™s important for anyone considering a franchise versus a business to carefully apply findings to their specific situations and decide from there. Though speculation is a common factor used in decision-making, itâ€™s never good to make definitive decisions solely on speculation.
With that said, hopefully some of the information presented here can help you determine the best decision for you.