Start from scratch or invest in a franchise?

By Retail Capital Time of article published Dec 18, 2019

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There are two models from which to choose when venturing into the world of entrepreneurship - apart from buying an existing company.

You can either buy into a franchise or start a venture from scratch. Each has pros and cons, but the one that works best for you depends on your business objectives and personality.

“Both ownership models offer distinct advantages and disadvantages, which require aspiring business owners to do their homework thoroughly,” says Charl Jacobz, the head of business development at alternative small business financier Retail Capital.

“When going the franchise route, you’ll have to invest in an initial licence fee and pay ongoing royalties to the franchisor,” he says.

“In return, you’re allowed to use their brand and trademark, sell their products and services, coupled with their ongoing support."

Independent business owners don’t have to pay a franchise fee or royalties, but they won’t get any support either. This means you are more or less on your own, he says.

The main advantage of running a franchise is the brand, services and products offered by the parent company have been tried and tested.

“It is like walking into a running business with a solid track record, an existing network of suppliers, a client and customer base, as well as support from the franchisor and the existing franchise network,” Jacobz says.

“However, a risk a franchise owner faces is that bad performances by other franchisees, or even the franchisor, may affect their business’s survival and reputation.

“The total set-up costs of an independent business may be a bit higher than the costs associated with an initial investment of a franchise licence, but what you get for that is total autonomy,” Jacobz says.

Another key disadvantage of owning a franchise is that it limits your creativity and individuality.

“Franchisees have to ask for permission to incorporate their personal touches and vision into their business,” Jacobz says, adding that other restrictions often apply to where and when you want to operate, the products you sell and the suppliers you use.

“This may be frustrating at times, particularly if you know for sure that your ideas will work.”

Setting up your own business from scratch is attractive, as it puts you in charge of your entrepreneurial journey, with no need to justify any of your actions.

“You’ll get to build something which you are in charge of. And if you strike gold, your venture could become successful enough to become a franchise,” he says.

“At the end of the day, there is no better or worse ownership model,” Jacobz says. “In the current economic climate, there is safety in running a franchise. Some people, however, prefer to tough it out alone and mitigate the changing currents of our economy themselves without relying on a franchisor’s input. The fact that someone else is calling the shots may be limiting.

“Speak to fellow franchisees and independent business owners, meet with experts, and attend relevant networking events that can tell you more.

"There is no wrong decision in terms of how you want to go about it, but you have to make sure you know what you are up against. Bad preparation and being uninformed are the biggest killers of small businesses,” he says. 


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