Your own business or a franchise? Pros and cons

Let’s start by saying that a franchisee is a business owner on crutches, and we’ll see why. Your own business has many advantages over a franchise, but it also has some disadvantages that a franchise doesn’t. There are three ways to make money in the franchise business:

1. Look at the different businesses that sell franchises and, after studying the type of business and franchise, buy one if it convinces you.

2. Start your own company with enough features to be franchisable and launch your own franchise system.

3. Become an expert in the franchise world and set up a business advising others as a specialist franchise consultant.

If you decide to buy a franchise, you need qualities that belong to two different worlds:

1. You need the character of an entrepreneur and business owner, because the franchise really will be your business.
2. You need to know when to bow your head and take instructions from the franchisor. You must be aware that you are the business owner, but you work under the same rules as if you were a company manager.

That’s why we said at the start that a franchisee is a business owner on crutches.

The biggest advantage of buying a franchise is that you become part of a business that already exists and whose profitability should be proven. Often, the most serious franchises won’t let you buy one if they think you’re going to fail.

With your own business, you start from scratch without knowing whether it will be profitable, because you don’t have a proven operating system. But be careful: success isn’t 100% guaranteed with a franchise either.

See also: 15 commandments that lead entrepreneurs to business success

Before you buy a franchise

Find out everything about how it works internally. To do that, it’s a good idea to visit franchisees from the same chain, but NEVER the ones the franchisor recommends: they might get a bonus for every new franchisee and not tell you the whole truth, since it’s in their interest that you join.

Visit some on your own. Meet one of them at a restaurant, in a relaxed setting, and get them to explain how things work. Ask about everything you want answers to. It’s without doubt the best way to gather information.

Which franchise to choose

When it comes to choosing a franchise, you can find one that is already established in the market or one that is just starting to expand.

A new franchise certainly carries more risk, because not even the franchisor knows how profitable it is. Personally, I advise choosing a franchise that has been on the market for years; the more cities it’s present in, the better the sign, since it obviously works. That said, never completely rule out a new franchise, because even today’s giants were new and small once. You need at least some intuition about where the market is heading.

As with any business or investment, you need to be clear about one thing: you need a good entry strategy, but never forget to have a good exit too, in case things don’t go as expected.

Before you decide, it’s essential to give a copy of the contract to your adviser (ideally one who specializes in franchises, since the system is different). They’ll tell you how many years you’re tied in for, or whether the royalties go up after a few years.

Make sure they don’t put too many obstacles in the way of selling the franchise to someone else. Otherwise you won’t have bought a business; you’ll have taken on an obligation for as long as you signed for, and whether you make a profit or not, you’ll have to keep paying the fee to the franchisor.

If the franchise is listed on the stock market, read its financial statements and stock market information, because if investors trust a franchise, it’s because it’s worth investing in.

Experts often give one piece of advice: invest in several franchises at the same time. That way you diversify your risk and have the chance to earn a double return, although that advice only works for those who have the capital to do it.

In short: I’m more in favor of having your own business than a franchise, but as the saying goes, “a franchise is the best way to train a business owner,” because they go straight into a business they can learn from in order to develop their own.

Further reading

• The entrepreneurial mindset
• Common mistakes Hispanic business owners make
• Start a business or buy one?
• The advantages of starting a business in times of crisis
• Why new businesses fail

Featured image: Department of Commerce. Office of the Secretary. 1913, Public domain, via Wikimedia Commons.