Franchises

To get into business ownership, there are three basic points of entry: 1) start from scratch; 2) buy a franchise; or 3) buy an existing business. Each have their own list of pros and cons.

A franchise is essentially a new business start-up that comes with instructions. You also get marketing support from the franchise that is helpful in obtaining customers. In exchange for the instructions, you must abide by all the terms and conditions in the instructions and pay various fees.

The value in a franchise is that it provides you with a proven (usually, at least) system for running the business. For example, you can buy a Taco Bell without needing to come up with a system for making tacos, training employees, etc. Also, you have instand brand recognition.

The dark side of franchising comes in two forms. First, there is an initial franchise fee, regular royalty payments, and other fees and costs that are required by the franchise agreement. Second, the system must be followed even if you think you have a better idea.

Depending on who you ask, logic says that starting your business with a ready-made and proven business system would be more likely to succeed than going it alone. According to the Small Business Administration (SBA), however, this just isn’t the case. A 2002 report entitled “SBA’s Experience with Defaulted Franchise Loans” reported that the failure rate (as measured by the number of loans the SBA had to purchase as part of it loan guarantee program) was slightly higher for franchises than for independent businesses from 1991-2001.

Of  course, the other alternative for a new business is to acquire an existing business. This provides you not only with an established system (that you can modify at will) but also established customers and cashflow.

Which of the three options is best for you is a question only you can answer. Your unique situation could lean in any of the three directions.

Just keep in mind when weighing your options that every business comes down to one basic requirement: You have to provide value to your customers. If no one is willing to pay  the amount you require for the goods or services you provide, then it will not matter what type of business you are.

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