6 Reasons Why Startups Are Riskier Than Franchise Businesses

October 16, 2018 5 min read

Opinions expressed by Entrepreneur contributors are their own.

Deciding to open a business is only the first of many decisions that an aspiring entrepreneur has to make on the road to small-business ownership. For most business hopefuls, the process will include a risk assessment to determine how much risk they are willing to take in exchange for varying degrees of reward.

In the nascent stages of business exploration, they’ll need to consider whether or not they want to launch a startup business or buy into a franchise. Both have their rewards, mostly decided by the personality of the entrepreneur. The guy who wants to make all of the decisions about how their business operates would find that freedom to do so a big advantage of a startup. The woman infatuated with the idea of turning her big idea into a multibillion-dollar global power would also enjoy that advantage that startups provide.

However, when it comes to assessing risk, there is little question that startups are riskier than investing in a franchise business.

Here’s why.

Related: The 10 Best Franchises to Open in 2018

1. You have to build your own brand.

Building brand identity is difficult and time-consuming, often taking years to establish. Most business owners lack the time and resources to spend years building up a brand from scratch, so they fail to grow outside their immediate circle of influence, or just plain fail. Whether it’s emerging or established, franchise businesses come with their brand already built, including logos, slogans, signage, buildouts, team apparel and more. So, a franchisee’s first day as a business owner isn’t necessarily the first time anyone in their market has heard of the business.

2. The mistakes that will be made will be yours.

This is a favorite saying in the franchise business, but it’s absolutely true. Whereas you may have an uncle that owned a business who is willing to offer advice, you’re mostly on your own when it comes to making decisions with your business. If you’re doing it first, you can’t know for sure what will work and what won’t. Hopefully, you’ll do more things right than wrong, but those wrong decisions can be incredibly costly. Franchise businesses have already been there. They’ve made the mistakes, learned from them and taught their franchise owners the winning way to do things.

3. You’re operating without a net.

A support system is critical to business success because even the best businesses are going to have challenges at times. When things get difficult, startup owners have to rely on themselves to figure out how to work through the issues and get back to good. Franchise businesses pride themselves in offering unparalleled support for their franchisees, offering around-the-clock support from corporate teams, regional directors and peer guidance. Chances are that someone, if not everyone, has been through whatever you’re facing and can offer detailed instruction for how to work through it.

4. Financing can be frustrating.

Startup owners have to do all of the legwork themselves to secure financing for their business. They have to write their own business plan, then sell their idea to family, friends or local banks in order to get funding. On top of that, most aspiring independent business owners rarely know how much money they’ll need to launch their business and how much they’ll need to survive during the years when the business is getting off the ground. Franchise businesses will help candidates craft their business plan, can often assist with preferred partners for financing and are able to let candidates know exactly how much money they’ll need to become franchise owners.

Related: 5 Franchises You Can Buy for Less Than $18,000

5. Operational resources.

No matter the business you choose, you’re going to need suppliers in order to operate your business. Even the smallest businesses often require website support, stationery, legal, financial and marketing help. For brick-and-mortar stores, tack on goods, industrial supplies, signage and more. Franchise businesses can offer those resources in-house or provide candidates with preferred third-party vendors. Not only that, but because of the scale at which they operate, they can often secure products and services for their franchisees at a discount from what an independent business might pay.

6. You need to create your own framework for success.

Too often, businesses fail because the owners are too engaged with the work and not nearly savvy enough when it comes to owning and operating a business. You may love working on cars, but unless you know how to choose the right location, hire, train and manage employees, handle marketing and keep the books, a car maintenance business may never make it out of the idea stage. Franchise businesses generally don’t require candidates to have strong business operational knowledge because they already have a system in place for them to follow and they clearly explain what type of skill set they’ll need to succeed as franchise owners.

Related: Just How Much Does It Cost to Own a Fast-Food Franchise?

None of this is to say that franchise businesses don’t have risks. Whether you’re investing in a startup opportunity or a franchise business, there are no guarantees of success. However, the aspiring entrepreneur excited to open a small business but lacking the knowledge or experience to do so would be wise to consider a franchise business to mitigate risk while building the lifestyle they’ve always wanted.