Invest in a franchise or do it alone?

Charl Jacobz, head of business development at Retail Capital.

Over and above purchasing an existing company you could 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 entirely on your business objectives and personality.

Running a business is not for the faint-hearted, but when done right it can be one of the most rewarding elements of life. A key decision you’ll have to make is whether you’ll buy into a franchise or build a new company from the ground up.

Pros and cons

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

“When going the franchise route, you’ll have to invest in an initial license fee and pay ongoing royalties to the franchisor,” he advises. “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 need to pay a franchise fee, nor royalties, but they won’t get any support either. This means you are more-or-less on your own.

Tried and tested vs. risk

The main advantage of running a franchise is that the brand, services and products offered by the parent company have all 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.”
When running your own business, you will have to do everything yourself, meaning you are in control for the full 100%.

“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 license, but what you get for that is total autonomy,” Jacobz points out, adding that fortunately, independent entrepreneurs have an array of funding mechanisms at their disposal to get their ventures financially off the ground.

“Over and above options offered by banks and other traditional financiers, the community of alternative lenders is growing.”

Creativity vs. autonomy

Another key disadvantage of owning a franchise, as opposed to running an independent business is that it limits one’s 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 of which you are in charge of. And if you strike gold, your independent venture could become successful enough to become a franchise, he says.”

No wrong decision

“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 concludes.