Franchising vs. Starting a New Business: A Statistical Perspective for New Entrepreneurs

Embarking on an entrepreneurial journey presents a unique set of challenges and decisions, chief among them being whether to start a business from scratch or enter a franchise agreement. While both paths have risks and offer potential rewards, unless you have a clear idea and passion you want to pursue from scratch, while also possessing vast expertise and knowledge of the industry you are aiming, the option of franchising comes with distinct advantages that can be especially beneficial for new entrepreneurs. This essay examines those benefits, supported by relevant statistics, to illustrate why franchising may often be the more prudent choice.

Established Brand Recognition

A crucial advantage of franchising is immediate access to established brand recognition. A study by the International Franchise Association (IFA) notes that franchises enjoy a higher rate of brand recognition over new startups, which translates into consumer trust and loyalty. This recognition can significantly reduce marketing costs, which for new businesses can consume between 20-30% of their budget in the initial years.

Proven Business Model

The success rate of franchises versus new businesses speaks volumes about the efficacy of a proven business model. Franchises generally exhibit a lower failure rate compared to independent startups. According to the International Franchise Association, approximately 92% of franchise businesses are still operating after five years and close to 90% after ten years, compared to an 80% national small business failure rate. Another study by FranNet showed that 91.2% of franchises were still in business after two years, and 85% remained open after five years showcasing the resilience and reliability of franchising as a business model.

Additional data from the U.S. Bureau of Labor Statistics, shows that about 20% of new businesses fail within the first two years, 45% within the first five years, and 85% during the first ten years. In contrast, franchises see a steady success rate of approximately 90% over the same periods.

Training and Support

Franchisors provide extensive training and support, a factor that significantly contributes to the success and longevity of franchise businesses. The IFA reports that over 75% of franchisees believe that the training received from franchisors was crucial to their success, covering essential areas such as operational procedures, marketing, and financial management.

Easier Access to Financing

Financing a new venture is a major hurdle for entrepreneurs. However, franchises are generally viewed as safer investments by financial institutions. The Small Business Administration (SBA) notes that loans granted to franchises have a 15% higher approval rate compared to new independent businesses. This is partly due to the lower risk profile associated with an established brand and proven business model.

Initial Costs and Return on Investment

While initial costs can be higher for franchises due to franchise fees and startup costs—often ranging from $20,000 to $1,000,000, these costs are often offset by the reduced risk and support provided by the franchisor. As per the IFA—the return on investment (ROI) timeline can be more favorable compared to starting a new business. Although it can vary widely depending on several factors, franchises often reach profitability faster due to established operational practices and customer bases. The average ROI for a franchise is typically achieved within 1 to 4 years, whereas new businesses can take 5 to 7 years to reach the same milestone, meaning many never actually reach that milestone, contingent upon the industry and market conditions.

Profitability

Franchises also tend to reach profitability faster than new startups due to the established brand, customer base, and ongoing support. A survey by Franchise Business Review found that over 50% of franchise owners earn profits of $100,000 or more annually within the first two years, a figure that only a fraction of independent businesses achieve within the same timeframe.

Network of Fellow Franchisees

Joining a franchise system provides access to a network of fellow franchisees who can offer advice, support, and camaraderie. This community can be an invaluable resource for sharing best practices, troubleshooting common problems, and fostering an environment of mutual success. For new entrepreneurs, this network can act as an extended support system, providing insights that are not readily available when starting a new business independently.

Downsides of Purchasing a Franchise

The are also some downsides to consider about franchising, although franchising could also permanently be or start as a side-huddle, purchasing a franchise demands a significant financial and time investment, with initial costs ranging from a few thousand to hundreds of thousands of dollars, on top of equipment, supplies, and licensing fees.

Franchisees must also navigate legal and contractual commitments, facing restrictions on products/ services offerings, marketing, and location. Additionally, franchisors enforce strict operational guidelines, including customer service, employee training, and pricing, which may hinder personalization to regional demands.

Conclusion

For new entrepreneurs, franchising offers a compelling alternative to starting a new business. With the advantages of an established brand, proven business model, and comprehensive support, franchising can mitigate many of the risks associated with entrepreneurship, however, the downside is that also upside potential is limited compared to starting a new business but as mentioned, in line to the risk.

The statistical evidence also underscores the advantages and outweighs the disadvantages of franchising for new entrepreneurs, including higher success rates, faster ROI, and greater profitability. While starting a new business offers the potential for innovation and independence, the risks and challenges are significantly higher. Franchising presents a structured pathway to business ownership, with the support, training, and established brand recognition that can lead to a more successful entrepreneurial venture. For those weighing their options, these statistics highlight why franchising deserves serious consideration.