Take an in-depth look at how entrepreneurial lifestyle, startup costs and survival rates differ between independent startup businesses and franchises. Learn which one is right for you.
If the stress of deciding between opening a franchise or an independent business is weighing heavily on you, rest easy. According to the 2018 State of Small Business Survey, entrepreneurs in each cohort reported an 8 out of 10 when asked about their happiness as business owners. It’s true, over the last 14 years we’ve seen thousands of people achieve their dreams of business ownership through both independent and franchise ventures, with one path no less exciting, challenging or fruitful than the other. The trick to choosing the right option for you is understanding the nuances of each business model and how they complement your professional strengths, weaknesses and business goals.
Take a closer look at how running an independent business differs from franchising:
Lifestyle Differences in Independent Businesses vs. Franchises
Independent businesses, also often referred to as startups, and franchises give you the chance to be your own boss and take control of your finances, but they can differ in terms of the lifestyle they offer to owners. If you’re looking to set your own hours and have the freedom to volunteer at your child’s school or take regular vacations, an independent business may be best as it allows true autonomy of scheduling. You can work whatever hours you want, even third shift, depending on the type of business. Franchises, however, usually have set hours that are determined by the parent brand — especially for brick-and-mortar stores — that may make it hard to take consistent extended breaks during work hours.
However, what franchises lack in schedule flexibility, they make up for in support and training. When you become a franchisee, you’re paying to use a business model that’s been proven successful in other markets. This includes marketing materials, best practices for hiring and even a territory to call your own. So when independent business owners have to put in long hours creating and tweaking their business strategy before they even open their doors, franchisees just need to implement what’s already been established, which still takes a lot of hard work.
Ownership & Decision-making in Independent Businesses vs. Franchises
If it’s important for you to have control over every single decision in your new business, then an independent startup may be a better fit for you. From the strategic details of your business plan to the color of pens you’ll purchase for the office, every decision will come back to you as the owner. Until you’ve hired staff to delegate to, the full responsibility is yours.
Small business owners who operate franchises don’t have the same amount of decision-making responsibility – a relief to some – but they also don’t have the same freedom to make changes to their products or services. Some franchisees are willing to give up that independence in exchange for gaining the security and stability that comes with an established business model; in fact, many find this preferable to the more chaotic atmosphere of running a startup. But others don’t enjoy the lack of freedom and would rather hold more responsibility, even if it does require more time and energy.
However, it may come as a surprise that even more franchise owners than startup business owners reported “ready to be your own boss” as a main motivation for becoming an entrepreneur, according the State of Small Business survey. So, it’s safe to assume that many franchise owners, while not operating 100 percent independently, are able to find autonomy when running their business. If this is something that’s important to you be sure to have a candid conversation with the franchisor early in the process. They’ll provide honest feedback as getting a great fit is important to them too.
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Startup Costs of Independent Businesses vs. Franchises
Directly comparing the cost of starting a franchise versus an independent startup is tricky, but there are differences in expenses that you should be aware of to better evaluate your budget and cash flow. If you open a franchise, you’ll need to pay not only an upfront franchise fee, but also a location build-out price and an ongoing monthly fee (either a flat rate or a percentage of revenue) that allows for continued use of the brand’s name and practices. The initial investment varies greatly — there are many franchise options under $50,000, but several of the larger, well-known brands can cost hundreds of thousands of dollars. The price and mandatory franchise fees have little room for negotiation and usually cost more than an independent business upfront, but you have the benefit of a fully operating business as well as built-in brand recognition.
Intuit reports that the average cost of launching an independent business is closer to $10,000. The lower initial price tag is likely related to the control the business owner has over the size of the operation. For example, independent business owners can delay their business’s opening or downsize before launching if the budget doesn’t allow for full-scale operations. Start-ups do require more money spent over time to maintain and grow the business, such as marketing materials, HRIS systems, payroll, etc. (These services/systems are typically included in the franchise fees upfront, and franchises can acquire them at a discount). As an independent business owner, you’re likely to spend more time and money researching, developing and purchasing these additional necessities.
These trends were similar for our survey respondents. The largest segment of franchise owners (24 percent) reported a total acquisition cost of $50,000 to $100,000 while 52 percent of startup owners spent less than $50,000 to launch their business. However, cash flow does seem to be a bigger challenge for independent business owners once operations are under way. When asked which aspect of running their business has proven to be the most challenging 70 percent of independent entrepreneurs reported a lack of capital/cash flow as an issue, while only 51 percent of franchise owners provided the same response.
Because of the vast difference in the cost to launch different types of businesses, understanding your business budget early on is a crucial step in moving forward. If you’re unsure of where to start, we recommend using a pre-qualification tool to determine your maximum project budget, as well as what financing programs you qualify for.
Survival Rates of Independent Businesses vs. Franchises
One of the most intimidating factors to overcome as a small business owner is the fear of having an unsuccessful business. Whether you’re funding your venture with debt, retirement funds or cash from family and friends, there is always a risk to your investment.
According to the Bureau of Labor Statistics, about 20 percent of all businesses in the U.S. close after the first two years of operation and a little over 38 percent after four years. However, these numbers vary greatly depending on the type of business you own. It’s generally accepted, because of their established, proven business practices, that franchises have higher success rates than independent businesses, but that comparison is not black and white.
There’s a lot of information about success rates of franchises, and to predict one brand will be successful while another won’t is extremely difficult. One way to research the risk of a specific franchise brand is to look at their SBA loan default rates. And you should also take into consideration how you found the franchise you’re researching. Partnering with an experienced franchise consultant who can help you make a good match is likely to increase your success rate since the brand aligns with your skills and goals. In a five-year study performed by franchise consulting firm FranNet, their results showed 92 percent of their franchise placements were still in business after two years, and 85 percent after five years.
Though the success rate of independent businesses seems to be more volatile, this isn’t true for all industries. Businesses in the finance, real estate, education and health sectors have almost a 20 percent higher survival rate after the first four years compared to those in the information industry, and a 10 percent higher success rate than retail and transportation industries. Despite the discouraging information you might find after a quick Google search on independent business survival rates, it’s worth putting in the time to research your potential industry before deciding whether you might want additional franchise support. And no matter the industry, if there’s a market for your product or service and you can outdo the competition, your chances of success are astronomically better.
Funding an Independent Business vs. a Franchise
You can also have an impact on the long-term success of your business, whether independent or franchise, based on how you fund your business. Eighty-one percent of all Guidant clients are still in business after four years, which can largely be attributed to our debt-free financing solution. Guidant helps clients use their retirement funds to start a business without getting a loan. This lowers overhead and eliminates monthly payments, allowing the business to become profitable sooner rather than later.
According to the State of Small Business Survey, both franchise and independent business owners who utilized 401(k) business financing had access to significantly more capital. Those who used Rollovers for Business Start-ups (ROBS) used between $100,000 and $175,000 to launch their business — significantly more than the $50,000 that 48 percent of all business owners reported using for initial business capital. We know that high numbers of business owners report a lack of capital as a business challenge; so having a healthy amount of startup cash could positively impact your business for years to come.
Over half of our clients who obtained SBA loans also used 401(k) business funding as an alternative to making their down payment, thus reducing their monthly payment amount and preserving their personal savings. Managing cash flow is crucial to the success of new businesses, and starting debt-free — or with more manageable payments — has proven to contribute to that success.
Even though it can seem daunting to choose between launching an independent startup business and a franchise, the good news is that each can put you on the path to success as a small business owner. Take the time to consider your personality as an entrepreneur, how you want your life to look as a business owner and how much funding you have available, and then enjoy the ride!