Start-up vs. franchise: Which one is best for you?

There is a certain allure in switching from being the employee to the employer. Setting up as an entrepreneur is something that has become increasingly popular, with everyone from teens to retirees – sometimes referred to as ‘pensionpreneurs’ – running their own businesses.

For those planning on following this trend, there is a key question to answer: to set up as a start-up or invest in a franchise? There are pros and cons that come with both options. Here’s a look at them.

franchiseSpot the difference

As a starting point, it’s good to know the difference between a start-up and a franchise.

The former is a new business. They are usually run and invested in by entrepreneurs and these entrepreneurs tend to offer a service or tap into an industry or sector with a product that they believe is needed or will make a difference. Some successful start-ups include Facebook and Airbnb.

A franchise, on the other hand, is a licence that allows a franchisee (the person who wants to run the franchise) to sell the goods or product that belongs to the franchisor (the established business).

This license allows the franchisee to use the name and idea behind the business and grants access to things like the parent company’s operating systems, stock and supplies. To do this, the franchisee usually pays start-up and annual licensing fees to the franchisor. The most comm example of a successful franchise is McDonald’s

The good

To know which option to choose, it can be useful to know what a start-up and a franchise has to offer, and lining this up with the pitfalls of each option.

A franchise has a lot of pros. The main one is that it uses a proven business model. This means that those who choose to run one only have to oversee the daily running of the business, so there’s a high chance of success. In addition, people already know the name, so there’s a customer base ready and waiting.

Add to this, the training systems that are in place across the company that allow franchisees to develop the skills in areas such as training and managing employees and marketing the product.

Start-ups are perfect for those seeking to be the captain of their own ship. This option is a blank page and requires an abundance of innovation and creativity. For those who want to explore their options, start-ups allow the autonomy to do so.

Plus, there is no one to report to. This is a new business and that allows for professional freedom.

The bad

The main negative point with a franchise is the fees. These fees can be very high from the outset, then there’s ongoing payments that could prove costly.

There’s also the issue of there being no freedom with a franchise. Everything from the logo design to the policies in place must two the company line and this can be restrictive.

However, being restricted in this way could be seen as a positive when compared to the major issue with start-ups: the higher possibility of failure. The creative and professional freedom to embark on a new venture go hand in hand with the risks of investing into a product or service that might not reap results.

There’s a high element of risk when it comes to both options. Each involves a lot of financing from the outset before any profits can be made and this could mean being savvy with savings or exploring the small business loans that are available.

Whichever option seems most appealing, taking the time to work out which is most suitable can be the best way to approach this decision.