Purchase a Franchise or Starting Up Your Own Business?

FranchisingMost people ask, “are buying a franchise unit will make you rich?”

My sole answer, “No – You WON’T.”

Why? Am I bitter toward franchising?

No – I am a big fan of franchising!

I believe the power of economy of scale and exponential growth – they are key to riches – both are present in franchising.

With economy of scale, a franchisee enjoy a better purchasing power – simple: 1 business ordering a widget gets different pricing to 100 business ordering the same widget in volume.

With the exponential growth of your franchisor, you enjoy better exposure and brand awareness without doing a thing on your part! Neat-o!

However, franchising has its drawback.

The not-so-good things about franchising

The benefits of franchising I mention above don’t come for free. In exchange of those benefits, you are obliged to pay a franchise fee (which has to be renewed after a certain period of time) and a royalty (or other forms of revenue.)

THIS is where people got wrong thinking that buying a franchise could make them rich.

Buying a franchise is buying a cash flow – yes, you can get a healthy (and hefty) cash flow. You can enjoy a good lifestyle owning a well-run franchise unit, and also enjoying the exposure in your local area (which may also translated into more clients and cash for you.)

However, in my humble opinion, that’s about it, really. You can’t really get rich and financially free by owning a franchise.

I agree what Yaro Starak of Entreprenerus-Journey.com said, that you will be rich AFTER you sell your business, not WHILE you run your business.

Why Franchising won’t make you rich

I believe you have heard stories about the acquisition of Feedburner, Blogger, and such – the owner is a rich man after their business is sold.

In other words, riches come in the form of capital gain, not cash flow. To describe – Cash flow keeps all gears working well, but capital gain buys you the engine.

Again, this is why you should consider starting up your own business – Your franchise unit does has valuable assets – but not the most valuable one – the brand name. No matter how long you own your profitable franchise unit, the owner of the brand is not you – it’s the franchisor.

If you eventually sell your profitable franchise unit, you are selling assets PLUS goodwill (cashflow, good local image, etc) MINUS brand name value. And that’s not a number you would love to see by selling your business.

In my opinion, the biggest selling point (and value) is your brand name – To have it, there is no other way unless you start your own busieness.

So, purchase a franchise or starting up your own business?

My answer – if you were valuing capital gain over cash flow, choose starting up yourself. If the other way around happened, choose franchising.

Also, consider your skill set and entrepreneurial style – no one-size-fits-all solution here :) One person can be a better franchisee than the other – this also applied to starting up a business.

Choose what kind of entrepreneurship you want to do – it could take decades to find yours. So I suggest start choosing now, before you got too deep in something you don’t like later on.

Ivan Widjaya
On franchising