By Jeff Swiggett
You would love to operate your own business, and over the years you’ve set aside money to invest in a company to fulfill this lifelong dream. And when it finally comes time to buy a business of your own, you’re left with two options: investing in a franchise opportunity or buying an independent business.
While both options put you at the top of the corporate ladder, they each have their own unique advantages and drawbacks. Learn about the pros and cons of each to help you determine which option is right for you.
Investing in a franchise: Be your own boss with limits
Franchises are essentially ready-made businesses. You don’t have to develop a new service or product that fulfills an existing problem. Instead, a franchisor provides the business model, training, assistance, and even market research. The products and services have already been developed, and the business typically has an established brand and customer base. When it comes to jumping into a more managerial role with established work processes, marketing strategies, and advertising, a franchise definitely has its benefits.
So, what is left for you to do as a franchisee? Of course, you’ll still have a lot to manage within the business. Just like a standalone business, you’ll need to:
Establish financing. This step is often easier since the franchisor already has a business plan and market research that investors want to see.
Decide on a location. While many franchisors offer support and research to help you choose the best location for your new business, you may still need to do some legwork to locate the best site.
Build or lease. Leasing a property will usually be more cost-effective; however, the operations may require a more specialized space, and there may not be any existing buildings for lease that fit the requirements.
Hire employees. The number of employees you hire will be based on the size and complexity of the operations.
Purchase or lease equipment. The franchisor will typically supply you with a list of equipment suppliers or distributors where you can purchase everything you need to run the business.
RELATED: Important Questions to Ask Before You Buy a Franchise
Caveats with franchises
There are several drawbacks when it comes to franchises. The most significant disadvantage is that you don’t have total control over how you run the business. After obtaining financing, hiring employees, and receiving training, you will still have to follow the rules set by the franchisor.
Franchisors will provide you with a Franchise Disclosure Document (FDD). This extensive document tells you all of the policies that you will have to abide by while running your business. It also outlines your responsibilities as a franchisee. If you decide to accept all of the regulations and fees, the franchisor will provide you with a formal franchise agreement.
Another disadvantage is that you will have to pay ongoing royalties and share your profits with the franchisor. Also, you should keep in mind that there will be other franchisees who have purchased the same business model. If another franchise owner operates their business poorly or develops bad PR for the brand, their negative reputation could impact your operations.
Lastly, the franchisor has the option to cancel your contract after the specified business term. So, you could love what you’re doing only to find out that the franchisor no longer wants you running the business.
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Buying an independent business: You are boss of it all
If you decide to buy a non-franchised, independent business, you get to make all the decisions. Purchasing an established business offers many of the same benefits as a franchise, but allows you to have complete control over the future of the company. From start to finish, business operations will rely on your knowledge and experience.
When you buy an existing business, everything is already set up for you. The business location, suppliers, operations, business model, and products or services will all be in place from the minute you sign the final paperwork. You will also have existing branding and (in some cases) a marketing strategy to fall back on. However, before you jump at the opportunity, it’s best to perform your due diligence and ensure the business will be profitable going forward.
One key advantage of buying an independent business versus a franchise is you don’t have to share your profits. You can also operate the company for as long as you want without worrying about having to renew a franchise agreement. And with complete autonomy, you can let your creativity and innovation shine when it comes to marketing and advertising your brand.
Caveats with independent businesses
Before you purchase an independent business, you should be aware you won’t receive any formal training for operating the company. While you could attend general business seminars or work with the former owner during the transition process, you won’t have the continuous support of a franchisor.
You will also have to find investors and lenders if you are seeking financing and working capital. Investors and lenders will want to see a business plan that outlines what your company is about, what services and products you offer, the current three- to five-year market potential, and future market revenues you will bring in. This is no problem for existing businesses that have seen consistent success. However, if you choose to buy a failing business, you may struggle to obtain the financing you need.
In the end, you’ll have more control of your business, but you also will have to accept all the risks.
RELATED: Buying a Business? 5 Essential KPIs You Need to Review Before You Buy
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