Starting a business can be a daunting, exciting, and challenging decision to make. Preparing to jump into entrepreneurship is a big decision. When you get to the jumping point, you may also want to consider whether it’s wise to launch your own startup or invest in a franchise.
A franchise vs startup comparison can help you better understand risks and prepare for your future investment of time and money. Each model has distinct advantages and disadvantages. What’s right for you will depend on you: your goals, professional experience, and appetite for risk.
This blog will compare franchise and startup business models, what starting each type of business looks like, and what types of business owners are likely to align well in each category.
Structured Support vs Creative Freedom
One of the most defining differences between franchises and startups is the level of structure provided by each model. Franchises are built to uphold established systems. When you buy into a franchise, you buy into a business model that has already been built, tested, and refined.
Your franchise will come along with brand guidelines, operating procedures, training programs, marketing strategies, and access to a broader support network. For new entrepreneurs, pre-built structures can be a major advantage and set the stage for success. You can compare this to living in a neighborhood with HOA rules and guidelines. Not everyone loves restrictions, but the rules are there to maintain consistency and value of a neighborhood.
In contrast, startups offer you complete creative control. You’ll be free to develop your own branding, pricing models, products, and operational style. This level of freedom can be very attractive to entrepreneurs who want to build something unique and tailor it to their vision. In the same vein, freedom comes along with risk and many times, a lack of guidance.
You won’t have an established playbook to follow, and your decisions, whether good or bad, will reflect on your management efforts. The thrill of owning a startup and freedom of innovation is definitely attractive, but it’s important to understand it comes with a steep learning curve and higher risk of failure.
Upfront Costs and Ongoing Investment
Many assume that starting your own business is cheaper than franchising, but the reality is more nuanced. While franchises require upfront fees and ongoing royalty payments, these costs often replace what you’d otherwise spend on branding, marketing, technology, and operational development.
For example, instead of hiring consultants to build your website or develop a marketing strategy, franchisees gain access to tested systems and tools. With this considered, royalties, typically around 7% of revenue, are a recurring cost that independent owners don’t pay. The tradeoff is brand recognition. A well-known franchise brand is capable of attracting more customers and driving higher revenue.
From a profitability standpoint, it becomes a math problem: if a franchisee generates $100,000 in revenue with a 7% royalty fee, they keep $93,000. An independent owner earning $90,000 with no royalty pays nothing extra, but still comes out behind, all else being equal.
Startups will give you full control over your budget and how much money you will spend. However, likely, you’ll end up investing a comparable amount into developing the same resources that come pre-packaged with a franchise. You’ll also need to account for trial-and-error expenses—things like ineffective marketing campaigns, inefficiencies, hiring mistakes, and other legal and operational issues. Without the guidance of an experienced franchisor, those early-stage mistakes can be costly.
| Franchise Vs Startup: A Comparison | ||
|---|---|---|
| Business Factor | Franchise | Startup |
| Initial Investment | Franchise fee + royalties | Branding, tech, consulting |
| Brand Development | Included in system | Built from scratch |
| Marketing Support | Provided by franchisor | Self-created |
| Operational Tools | Pre-built platforms and systems | Must be sourced independently |
| Risk of Early Overspending | Lower (due to structure) | Higher (trial and error likely) |
Risk, Flexibility, and Long-Term Goals
The level of risk involved is another major factor entrepreneurs need to consider when deciding between a franchise vs startup. Franchises are commonly seen as low-risk investments because they come with a track record of success, especially if you choose to work with a well-established brand.
Many franchisors also provide performance benchmarks and market research to help guide investor decision-making. Because franchisors are invested in your success, you will still face some challenges, but it’s far less likely to experience complete uncertainty.
Startups also come with a higher potential reward, but with high risks of failure. The rate of failure is significantly greater for new, independent businesses, particularly in the first few years after launch. However, with that risk, comes a greater degree of flexibility and growth potential.
You can decide how to scale, when to change direction, company branding, and the culture you want to create. You won’t be bound by restrictions or resale limitations included in many franchise agreements. You’ll likely have a more affordable exit strategy.
Ultimately, the right choice comes down to what you are comfortable with and what your personal and professional goals are. If you’re looking for a low-risk profile investment, something that can provide better guidance into business ownership, and you’re comfortable working within frameworks and rules, a franchise could be the better option. Alternatively, if you crave independence, you’re not afraid of risk and uncertainty, and want complete creative control and freedom, a startup could be for you.
Still on the Fence? Contact Franchise.com Today!
Whether you should own a franchise vs startup is a personal choice. Each business model provides unique opportunities, and they both come with real challenges. Franchises can offer stability and structured support systems. Startups can provide breathing room to have full creative and direct control over the development process. Making the right decision will depend on your personal strengths, goals, and the risks you are willing to take.
If you still have questions about franchise vs startup opportunities, or you would like to discuss specific franchising opportunities more in depth, contact us today!
