The Difference Between a Franchise and an Independent Business

Apr 10, 2024

When considering new business ownership, one of the biggest decisions is whether to launch the company from scratch or purchase a franchise from a proven brand.

While both approaches offer opportunities for entrepreneurship, the business models differ substantially in terms of structure, autonomy, and support. If you have dreams or intentions of embarking on your own business ownership journey, it is important that you understand the differences between these two business models, then choose the structure that suits your needs best.

The following are some of the biggest differentiators between operating a franchise versus running an independent business:

Startup Costs

A key difference between a franchise and stand-alone business relates to start-up costs. When launching an independent business, owners generally possess a lesser understanding of their total initial investment. Due to common unknowns like supplier options, marketing expenses, equipment costs, and other expenditures, budgeting and financing can be more challenging as an independent business owner.

New franchisees possess greater insight into their upfront investment early on due to the discovery process and training provided by the franchisor. These startup costs include a Franchise Fee – generally a one-time payment to the franchisor in exchange for the right to operate under their brand and business model. Royalty payments kick in shortly after launch based on a percentage of the franchisee’s gross sales. For the most part, franchisees often have a greater understanding of both their initial investment and long-term costs involved in running their business.

Launching the Business

Getting a new business off the ground is a wonderful and rewarding feet, regardless of whether the company is a franchise or an independent enterprise. However, one of the biggest contrasts in these business models is in their launch approach. The onus is on independent business owners to plan and implement literally every detail of their start-up strategy. While this arguably affords stand-alone business owners more creativity and greater freedom than their franchisee counterparts, it also requires a much more substantial amount of effort, time, and guesswork.

One of the most appealing factors for many franchisees is access to a proven, streamlined, and well-defined launch process. The best franchisors develop comprehensive franchisee onboarding that includes operational guidelines, marketing resources, training, competitive insight, and numerous other assets. Franchisees also benefit from immediate name recognition and brand association due to the franchisor’s established position in the marketplace.

Addressing the Competition

The way franchisees and independent business owners approach competition is very different. Stand-alone business owners are generally not confined by contract nor covenant on where they can operate and compete. This affords them greater freedom related to location, adaptability, and other market dynamics.

In contrast, Franchisees are usually contractually designated to operate within a specific territory. While perhaps more limited in geographical scope than an independent business, the Franchisor has usually already researched and defined the market viability within each of its franchise territories.

Getting Support

The freedom of independent business ownership comes at a cost, particularly in securing support and insight when needed. Navigating business challenges can be time consuming and pricey, as these owners must first be adept enough to be able to identify their issues, then capable enough to secure the best solutions and resources to resolve them.

One of the greatest advantages of operating as a Franchisee is the built-in and comprehensive support offered throughout the franchise system. Franchisors provide start-up tools, operational guidance, ongoing training, technical assistance, marketing kits and countless other support programs. When faced with a challenge or concern, franchisees are a single phone call or email away from the answers they seek. Most franchises also have an accessible and eager network of fellow franchisees that offer guidance, support, and fellowship.

Looking at Success Rates

There are no guarantees in business, so it is important to consider the statistics surrounding longevity. According to Investopedia, approximately 25 percent of independent businesses shutter within the first year. Of those remaining, another 50 percent fail within five years and only 30 percent of those are still in business a decade later. These numbers are likely reflective of the speculative and often risky nature of launching a new and unproven business venture.

Franchises have a much higher overall success rate. A recent study by FranNet reported that 92 percent of franchises were still in business after two years in business and 85 percent after the first five years. That is a difference of 35 percentage points over independent businesses.

This is not to say that every franchise possesses the potential for greater long-term viability than that of an independent business, so it is essential to thoughtfully assess market demand, competition, and other key success factors when considering any business opportunity.

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