Franchising vs Launching A Startup Business: Which Model Is The Winner?

These days, entrepreneurship is more accessible than ever before - in fact, in the USA, 10% of working adults are either freelancers or own their own business. Online marketplaces, digital tools and the advance in AI all mean that we’re no longer held back by the prohibitive costs of setting up shop for ourselves.



While many of the traditional barriers have now been busted, budding business owners still face one important question - build a business from scratch or invest in a franchise opportunity?

With the first option, you turn your great idea into reality starting from the ground up whereas franchising involves buying into an established business such as a pizza store, and running your slice of that business as your own. Both of these options can be extremely rewarding and even lucrative however, they both also come with limitations and risk levels. In this article, we’re looking at the key differences between these business models to help you decide which one best aligns with your goals.

Franchising: A low-risk but high-cost model

Becoming an entrepreneur can be a bit of a leap into the unknown - which is why many people look for fast-growing franchise opportunities in order to minimize some of the risks involved with starting a new business. Franchise models often come with predefined systems; which means that a lot of the boring set-up stuff is already in place for you, significantly simplifying operational decisions.

That’s not to say that franchising is for everyone; while some welcome a ready-made structure, others may find it difficult to innovate or put their own stamp on the business within the predefined brand guidelines. It’s also worth noting that as with any other business, a franchise is subject to consumer preferences and trends which may add further challenges. It’s important, therefore, to evaluate whether the structure and pace of growth align with your resources and goals. To do this, you will need to examine your long-term objectives and risk tolerance as well as weighing up  the brand’s forecasts before signing on the dotted line.



Other factors to take into consideration are:

• Cost - Depending on the brand, a franchise will usually cost between $10,000 and $1 million - and a percentage of this must come from the buyer’s own funds (rather than a loan)
• Royalties - Once your business is up and running, you’ll be required to pay a royalty in the form of a percentage of your revenue - even if you’re not making a profit
• Creative control - When running your franchise, you will be corseted by the brand’s rules and guidelines which some may find is a cramp on their creativity and innovation
• Contract - Your business will be bound by a contract with the brand which can have legal and financial repercussions
• Flexibility - Some franchisees find that the brand’s systems are inefficient or out of date - particularly compared to some digital-first business models. This can be frustrating when you don’t have the power or permission to make changes

The good stuff

In the last section, we mentioned a few things that might hold you back from buying a franchise - but there’s also some pretty great stuff too! To begin with, you’re tapping into a brand that your customers already know and trust - which really is half the battle for a new business owner. This, in turn, will often allow you to start making a profit and building your empire more quickly. You’ll also have access to ready-made systems, support and marketing materials and, in many cases, training your staff will be taken care of for you too. Although no business is guaranteed to be risk-free, statistically franchises tend to show impressive resilience during economic bumps in the road - giving you a good shot at survival even during hard times. Finally, banks are often fairly willing to lend to franchise owners as they consider this a safe investment.

Launching a startup business: low cost but without a safety net

So, we’ve had a rummage around the highs and lows of franchising but, what about startups ?



In this section, we’ll look at this business model so you can figure out if a startup is a non-starter or a winner for you.

• Costs - just like a franchise, you’re likely to have up-front costs which may have to come out of your own pocket. Unlike a franchise,however, banks may be reluctant to lend you what you need to get started
• Cash flow - very few businesses start bringing in the moolah right away so it's likely that you’ll have to tighten your belt for a few months - or even years
• Time and effort - A startup will usually have a lot of moving parts including buying stock, doing the books and marketing your business - including digital marketing such as social media, content marketing and SEO. You’ll probably be doing most of this stuff yourself too as you may not yet have staff so be prepared for some long days
• Know how - Getting your startup off the ground will require a number of different sets of skills so you’ll need to be a fast learner (the key here is to get to grips with automation, no-code tools and performance-based platforms)
• Support - Yep, you’ve guessed it - you won’t have too much of this when you first get started so when it comes to making decisions, sorting dodgy equipment and other issues, the buck really does stop - and start - with you

The good stuff

So, if we haven’t quite scared you off yet, the good news is that there are plenty of upsides to launching a startup. To begin with, it’s your business, so you have every creative freedom you could want in terms of brand, tone and philosophy. While you may have some initial costs, you won’t however be paying franchise fees or royalties - so more of your cash stays in your business. Finally, you can also rebrand or pivot whenever you like if something isn’t working - as well as scaling to different locations in your own time-frame.

The third option

If neither a franchise or a startup is enough to get you excited, there's a third option. Many people choose a hybrid or white label model which offers the best of both worlds. While you still get to flex your entrepreneurial spirit by selling under your brand and your own rules, you have the benefit of using another company’s infrastructure through a licensing agreement.



This model allows you to balance independence and risk by taking advantage of funding, mentorship and resources in exchange for a level of equity in your business. This is ideal for those looking for structure and support without being confined by the restrictions that often come with a franchise - and is a great way of scaling fast but with a safety net.

Key questions to ask before coming to a decision

• What’s your risk tolerance?
• Do you have the resources to make mistakes or do you need a tested formula?
• How important is brand ownership and legacy to you?
• Do you have the confidence to go it alone or do you need guidance and support?
• Are you motivated by autonomy, or do you need the backup of a team and structure?
• What’s your financial starting point?

Franchises will almost always require significant upfront investment whereas many startups can be launched on a shoestring. Money aside, are you able and willing to learn quickly and adapt? Startup founders need to be ready to “fail forward” and to perform multiple roles within the business - often all at the same time.

Franchising vs Launching a Startup - At a Glance

When deciding between a franchise and a startup, there’s a lot to think about and the following will give you an idea of the flash points:

A franchise business

• Low risk - Buying into an established brand is a relatively safe option
• Fast - A franchise business has the structure in place to get to market quickly
• Support - Your business will be supported by experienced professionals
• Training - Training will often be provided by the franchisor
• Cost - You will need to pay an upfront fee plus royalties regardless of how much profit you make
• Limited freedom - Your business will be subject to rules and regulations laid out by the franchisor
• Low growth potential - Factors such as territory restrictions may limit growth

A startup business

• Low set-up costs - Depending on your business, you may be able to get started relatively cheaply
• Full creative control - You don’t have to answer to anyone when making decisions
• No support - You won’t have anyone backing you up unless you’re able to pay for support
• Training costs - You’ll be on the hook for training your staff (and will usually have to train yourself in many aspects of your business)
• Time and effort - Getting your business off the ground will be hard work and you may find that you’re working around the clock
• High growth potential - If your business succeeds, the sky’s the limit for scalability and growth

And the award goes to...?

We hate to disappoint you but there is no winner or loser when it comes to these business models because it really depends on your business, your personality and your short and long-term goals.



What we can tell you is that if you're an independent go-getter who isn’t afraid to embrace risk and make mistakes then you’re on the right path to becoming a successful startup founder. If, however, you want a lucrative business but need support and structure then you’re likely to become a model franchisee.

Finally, whichever model you choose, keep a clear vision, stay digitally agile and build a strong brand that continually resonates with your customer’s needs - and you won’t go far wrong.