Buying a Franchise vs. Starting From Scratch

Embarking on the journey of entrepreneurship today presents a critical fork in the road: should one buy into a franchise or venture into the uncharted waters of starting a business from scratch? Unfortunately, the answer isn’t so simple — the studies of failure rates between franchises and independent businesses vary significantly and the decision really comes down to a myriad of factors such as industry conditions and financial strategy. 

“There is a benefit to doing your own thing, but there is also a benefit to going with a franchise,” said Mike LaRue, vice president of franchise development for Angry Chickz, the Nashville-style chicken franchise. “Each one also has its hurdles. So, it really depends on what you want and your desired quality of life. The first question I’d ask: Where do you see yourself in five years?”

Franchising offers the allure of jumping into the business world with a safety net. The model comes with a blueprint for success, providing franchisees with a proven business model, branding and ongoing support. So, what's the catch?

“There's a stigma around franchising, and I think it has to do with the royalty fee — why pay this fee if I'm doing all the work myself? Ideally, with the right franchise, the economies of scale from having multiple units should significantly outweigh that cost,” said Brigham Dallas, founder of Hello Sugar, the waxing and sugaring salon franchise. “This allows for quicker scaling and less financial loss at the startup phase.”

Dallas illustrated this with an example from Hello Sugar. “We have a 6% royalty fee, but our use of AI technology, for example, has recently reduced labor costs from 12% to 5% at our corporate salon in Arizona,” he said. “That is just one example of how those savings can surpass the royalty expense.”

Yolanda Stevenson, who started her transportation-to-school company Taxi Mom from scratch 20 years ago and has since franchised the concept, has seen both sides of the equation. For her, the answer is simple.

“Hands down, buying a franchise is the better route because starting from scratch can be very hard,” Stevenson said. “It takes years to start up anything you do, but at least with a franchise you already have that infrastructure. You should be able to just get in the car and turn it on.” 

Moreover, Dallas emphasized the advantage of easier financing for franchises. "It is very difficult to finance a start-up," he said. “Whereas obtaining an SBA loan for a franchise is comparatively straightforward, making it a viable path for most entrepreneurs looking to build wealth through debt-financing.”

Conversely, the path of starting a business from scratch caters to those who yearn for complete creative control and the challenge of building something entirely new. Of course, venturing solo lacks the immediate support network that a franchise system offers, posing higher initial risks and challenges. 

And not all businesses are created equal — the industry in question also plays a pivotal role in this decision. 

“If a business has a lot of competitors, like the pizza world, you will probably make more money with a franchise because the legacy competitors are just too big to compete with,” said Dallas. “However, if the business is unique — something that isn't really out there or doesn’t have a lot of competitors — there might be an opportunity to carve our your own niche.” 

One recent example, Dallas says, is pickleball. “There is a ton of space out there right now for a really well run system to come in and take over that market,” he said.

LaRue also advised that in saturated markets, such as pizza or tacos, aspiring entrepreneurs might benefit more from franchising first and learning from an established system before potentially branching out on their own.

Another important aspect is the market in which the business will be operating. “I always tell any prospect — go through your city, see if there are any permits or licensing required to start this business,” said Stevenson. “That is not our job as a franchisor. We don’t live in the same city. I know my city, you know your city. Anybody that is starting any type of company needs to do their research.”

Overall, whether one chooses to buy a franchise or start a business from scratch, the decision should be informed by a thorough assessment of personal goals, industry dynamics, financial strategies and an introspective look at one's willingness to either adapt to a franchisor's model or navigate the challenges of building a business independently. 

“Whether you start from scratch or start a franchise, you have to have the ability to step back and trust the business model,” said LaRue. “A lot of times people have a difficult time doing that, so they stay away from franchising like it's the plague. It is also important to ask yourself: Are you only doing your own thing because it is difficult for you to hear other perspectives? When you are a franchisee, you have to have an open mind and follow the systems of somebody else. If that is difficult for you, franchising may not be right.”

For more info on buying a franchise vs. starting a business from scratch, check out these related 1851 Franchise stories:

• Start a Business or Buy a Franchise: Which Is Right for You?
• Should You Buy a Franchise or Start Your Own Business?
• How to Select a Franchise, What You Need to Know