Do you want to run your own business but need help deciding whether to buy a franchise or start a small business? Choosing between a franchise and a small business can be challenging, as both have their advantages and disadvantages.

We have put this article together to help you make the right choice. In this article, you will learn the differences between starting up a small business and buying a franchise.

We will also talk about the pros and cons of starting a small business vs investing in a franchise.

Difference Between A Small Business and A Franchise

So, how does a small business compare to a franchise?

What is a Small Business?

A small business, also known as a self-standing business, is a privately owned company or partnership with fewer employees or fewer annual revenue than other regular businesses.

A typical small business has less than 500 employees and is managed by the owner. It has a simple business structure and is easy to handle. The owner makes the rules and regulations in this kind of business.

What is a Franchise?

Franchise, on the other hand, is a type of business in which an individual known as the franchisee (who buys the franchise) is granted access to the trademarks and business knowledge of a much bigger multinational company known as the franchisor (owner of the franchise).

This allows the franchisee to sell products and services under the business name of the franchisor. When you open a small business, you own your brand, but in franchising, it is a different case. Someone else (the franchisor) owns the brand, and you are just benefiting from the brand for a fee as a franchisee.

What distinguishes a Franchise from a Small Business?

Unlike small businesses, in which the owners have the right to make or change their business rules whenever they want to and run their business however they like, the franchisee here typically abides by the franchisor's rules.

Before acquiring a franchise, the franchisee will have to pay the franchisor an initial fee and, as the case may be, will also pay royalties to the franchisor.

Once this is done, the franchisee can use the franchisor's trademark and business system to sell its products and services. The franchisee may also be entitled to support from the franchisor, as the case may be. Let's look at the pros and cons of starting a business and buying a franchise.

Small Business Pros

1.     Flexibility

Having your own small business gives you maximum flexibility; this is one of the main reasons many people want to start their own business. You are allowed to decide your business hours, your business location and your choice of a working environment.

You can decide what is easiest and best for you and go for it. When the business is new, you may have to work all the time as you are still building your business, but you will be able to decide when and where to work by the time your business is fully established. Having your own business saves you from working for regular office hours unless you choose to.

2.     Be Your Own Boss

Having your own business makes you the boss of your own life. You have freedom over your lifestyle choices and financial decisions. You won't have to depend on any boss or company to decide on what you do as in the case of a franchise.

As the owner of the business, there would be no need to consult anyone before making decisions except in special cases. Having your own business is ideal for people who love being independent.

In cases of recession, you can decide to cut down expenses and maybe invest in new products to reduce the effect of the recession.

You will not be able to do this as an employee, and when your salary is being reduced or you are laid off from work due to recession, you will have to accept it. Having your own business helps you make decisions in such ways that will favor you.

3.     Financial Benefits

You have a high chance of making more money working for yourself than working for someone else. That is one big benefit of having your own business. You will be able to reap bigger financial rewards as your business becomes successful.

Owning a business comes with financial risks, but the financial rewards are numerous. If you do not have employees or a business partner, you won't have to worry about paying them. If you have employees, too, they are likely to be few, and that means fewer people will be taking a cut of your earnings.

If you desire a higher salary than you are currently making, having a small business will allow you to make huge progress in your annual income. Working for someone else can not do that for you, and it can barely increase your annual pay.

4.      Power and control

The feeling of being able to control your decisions is satisfying. You have control over the customers to sell to or suppliers to buy from. You make the rules as the head of the organization, and of course, you can set up the company's regulations and decide what is and isn't acceptable in the workplace.

You can decide solely about the workplace schedule, work hours, customers, product and services suppliers, location and more.

And when you hire employees, you can make them abide by your rules and regulations. Power and control are one of the top benefits of having a small business compared to purchasing a franchise; especially if you do not like to work under authority.

5.      Personal Fulfillment and Growth

Another huge advantage of being a small business owner is the personal fulfillment you get from building the business from scratch, investing your talents and resources in it and watching it grow; this sure gives a total feeling of satisfaction and fulfillment.

 When you build a business from scratch and it becomes successful, it gives you an overwhelming feeling of fulfillment. The thought of owning a particular product or service you deliver equally gives a feeling of fulfillment.

Being a business owner also helps you to learn different skills, such as business and leadership skills which leads to personal growth.

You get to do what you love by being a business owner. You can even build your business based on your values and beliefs. The best kind of work satisfaction and fulfillment comes from being your boss.

Small Business Cons

1.     Lack of Guidance and Business Experience

Being a business owner requires professional skills and business experience that you may not have, and as the boss, you may need someone to turn to for advice.

It would have been a different situation if you were to be working in a business firm, as your boss would be there to guide you. Being your boss without business skills and experience can result in a series of mistakes that may gravely affect your business.

In cases where you lack the skills, you should look for a successful similar business like yours and ask to be taken as an employee or an apprentice.

Selecting a successful similar business does not mean choosing one in your market location; that will only lead to competition when you eventually launch your own business.

It is recommended that you choose a business outside your market location. Working for some time in a similar business like yours is an excellent way to gain skills that will enable you to run your own business successfully.

2.     Financial Risk

Being a small business owner comes with many risks, and losing money is one of them. No matter how careful you are about separating your wealth from your business, there is every chance that you will still encounter financial risks associated with starting up a small business.

A large number of business owners take out a loan when starting a business, this is to help them fund the business, and this puts them in debt from the very beginning of the business.

Business owners often lose their investments regardless of how careful they are. And the situation can be worse when you take out a loan without managing it carefully.

Starting a small business is risky, as there might be troubles, and you are not sure the business will perform well. Since most startups fail, it’s a risky investment to take loan to start your business because you are not sure if the business will survive, especially during economic downturns.

3.     Lack of Steady Paychecks

Many people think running a small business is all rosy and beneficial, but that is not so. You will need to make lots of sacrifices as a business owner. Some business owners do not make it when their business is at the beginning stage.

They pay their employees but reinvest their salary into the business, all in a bid to grow it; this often affects their families as there is less or nothing to take home at the end of the month.

The fact that the business is new makes it more resource consuming, as more money is invested in advertisement and promotional strategies to grow the business.

4.     Financing Can Pose a Problem

Startups need funding in the beginning stage of their business. Financing institutions and investors are mostly skeptical about funding startup businesses because their financial performance and business growth is still being determined.

Business financing resources and banks often ask for requirements such as collateral assets, good credit scores, and strong financial projections, which many small startup businesses can not boast of these.

Funding is one of the biggest problems small businesses encounter in the course of starting up their business. Many entrepreneurs who wish to start a business end up failing to do so due to lack of funds.

5.     Failure

Success is not guaranteed at the start of a new business. There are chances that you may fail or succeed. Because you are starting a new venture, you may need to do things right or have the right strategy and business plan to thrive.

It would be best to have a strong sense of responsibility and healthy values to stay on the right track and not sabotage your business. Many factors can make you fail in your business. It may be funding, attitude, business plan, lack of proper experience and guiding or having the wrong business mindset.

6.     Starting Up A Small Business Can Be Time-Consuming

Managing your business requires commitment, and part of the commitment may be working long hours seven days a week. Unless your total revenue is massive, you may not have the resources to hire employees, so you have to do extra work.

Starting your own business is not easy; it requires lots of sacrifices. You may have to sacrifice your leisure time to get things done correctly.

Many business owners, as a result of these reasons, do not have time for themselves and their families, resulting in strained family relationships and, sometimes, health issues due to stress.

 Franchise Pros

1.     Franchises Come with an Already-Crafted Business Plan and Model.

If you want to avoid the stress of making your business plan, doing interior and exterior decor, and deciding on the product to sell or services to render, buying a franchise is the best for you. Buying a franchise means buying into a certified business model.

When you buy a franchise, you save the time and money you would have spent on creating and testing your business plan and model. Indeed, buying a franchise prevents stress, as you can start up your small business without some of the usual startup headaches.

2.     Instant Brand Recognition and Awareness

Starting a business from scratch means you would have to build your brand and customer base from the zero level up, and of course, this would take time. But when you buy a franchise, you gain instant brand recognition.

Franchises are already well-known businesses, and consumers are already familiar with the franchise name; hence you don't need to start working to create awareness or be recognized, as the brand name alone can attract customers from the start.

 Even if you are opening a franchise branch in a small town, people automatically know what your business is, what products and services you sell, and what to expect. Buying a franchise saves you a lot of stress in building brand recognition.

3.     Access to Business Assistance

Securing assistance as a franchisee is way easier than when you are starting up a business yourself. Business assistance can come through financing, startup equipment or guidance.

If you are lucky, your franchised business may have a financing arm that provides loans for people who want to buy and open a franchise. Their rates are sometimes unfavorable, but many franchisees prefer getting loans this way to avoid going through the stress of getting a loan from a bank, as the process can be very tiring.

In most cases, franchisors will provide you (the franchisee) with the business advice you need to be successful in your franchise. You can ask those who have done or are still doing the same thing you want to do.

4.      Lower failure rate

With all the business assistance and brand recognition, it is hard for a franchise to fail. Generally, franchises have a lower failure rate than independent startup businesses.

When you buy into a franchise, you join a successful brand where you can easily get support and advice, making it easy to run your business. Franchises also have an already successful business; hence, you are reassured that people need the products or services you'll be selling.

 5.      Lower Risk Business Opportunity

Whether starting an independent business or purchasing a franchise, starting a business generally comes with many risks. Still, the risks are lower when you are investing in a franchise, and this is because you're buying into an already proven or successful brand.

When you buy a franchise, you already know the brand is successful and recognized. If the franchise is situated in a good place and customers keep coming, there is every chance you will succeed.

Franchising is ideal for people who desire to be small business owners but are scared of risk. The lower risk associated with running a franchise also makes it easier for franchisees to get business loans.

 6.     Easy to Get Business Advice

In most cases, franchisors will provide you (the franchisee) with the business advice you need to be successful in your franchise. You can ask those who have done or are still doing the same thing you want to do.

Getting training and support to help you run your business is also very easy. Buying a franchise is a great idea for new entrepreneurs who need to gain the required knowledge or experience to start up their businesses on their own.

Franchise Cons

1.      High startup costs.

One of the top problems of starting up a franchise is the high startup cost. Sometimes, the startup cost for a franchise might even be higher than what it will cost to start an independent business.

Buying a franchise might not be a good idea if you plan to start a small business and don't want to take out a huge loan or invest lots of money. You must check your budget before investing in any business to avoid making mistakes.

Apart from the franchise fee, you may also have to pay for advertising and training. And then, if you do not have enough capital, it will most likely be difficult to succeed.

2.     Lack of Flexibility

Becoming a franchisee means you must abide by the franchisor's rules and keep to the terms and conditions of your licensing agreement.

You may not be able to make changes, like changing the look of your store, products, business location, pricing, hours of operation, mode of service and advertisement and staff uniforms.

You may even be required to use the franchisor's selected suppliers or obey specific rules of operation that do not appeal to you.

Saying that buying a franchise makes you your own boss is not totally true because you are not entirely in control of your business, and neither can you make decisions without considering the opinion of your franchisor.

These rules are indeed made to achieve uniformity in branding, but they can be frustrating and hinder innovation and creativity.

 3.   Lack of Privacy

Buying a franchise most times deprives you of your right to privacy in your business. Some franchisors may include in the agreement that they will be inspecting the financial aspect of the business.

Unless you do not have a problem with that, it could pose a big problem in future. Some franchisees value their privacy and wouldn't want someone infringing on it. Hence the lack of financial privacy can be a big issue for them.

 4.     Lack of Control Over the Fate of Your Business

As a franchisee, you have no control over the fate of your business in the future. Your franchise depends on the current state of the bigger company, unlike how it is with an independent business where you have total control.

Your franchise will also be affected if something bad happens and the brand has issues. As much as you benefit as a franchisee from the brand recognition and support from the company you buy their franchise, you can be affected by their scandals or problems.

5.     Future Fees

In most cases, franchises have a royalty fee, and may also have a marketing fee unlike a small business. These fees can be a percentage of the revenues or profits generated by the franchisee, affecting your net income.

The royalties are typically paid to help cover the costs of ongoing support provided by the franchisor. While the marketing fees are paid to expand the brand nationally.



The Final Word

Buying a franchise has pros and cons, like starting up a small independent business has pros and cons too. You have to check yourself and know which one you can improve before investing in either a franchise or a small business. With the pros and cons of each listed above, you can think about it and determine the one you fit in. You can as well do your research before making a choice.

Ray Glover, CFC, Glover Franchise Consultants