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So you’ve decided to become a franchisee or small business owner. You’ll get to be  your own boss rather than work for someone else Good for you!

Owning a franchise is exciting, but challenging too.  Before taking the plunge you should do some research first. One of the first things you may want to consider is whether to become a franchisee at all. Starting your own unique business might appeal more to you. 

Selecting between these two major categories of self-employment requires a great deal of thought. They are wildly different. Here are a few things to consider as you try to make your decision.

What is a Franchise Exactly?

Many U.S. companies provide goods and services via franchises. Many of the most popular American companies you know and love are franchises. 

Fast-food restaurants are the most common franchises we think of. However a wide range of businesses exist as franchises in the U.S. Your child’s daycare center may be a franchise, just like your automotive repair shop. 

Most franchises require franchisees to pay an entrance fee, along with a percentage of gross revenue back to the parent corporation. Franchises thus provide a bit of both freedom and security compared to standalone businesses. This is a great fit for many people. 

What is a Business Opportunity?

A business opportunity is far less structured than its franchise equivalent. You are given basic information about an industry and how to operate within it. However, you’re under no obligation to promote a particular brand or to conduct business in a particular manner.

You are captain of your own ship. However, while you have more independence, you also lack the franchise’s security and established brand.

Franchise Opportunity Benefits

Purchasing a franchise provides you brand name recognition the  minute you open your doors. No one questions the fact that Dairy Queen is a great place to buy ice cream.

The franchise is invested in your success. Most franchises provide initial and ongoing training to improve the company’s overall success. Additionally they often sponsor  regional or national ad campaigns, as well. 

Franchises will normally help new franchisees identify good locations to site their businesses as well.  Furthermore, owning a franchise means you will seldom worry about supply chain issues throughout your career. 

It’s simply not too scary. Especially when starting a franchise like a Subway that requires very little initial capital since a sandwich shop is a pretty basic establishment.

The Downside to Franchise Opportunities

A legitimate franchisor will not allow you to buy into their system unless you pass a rigorous review process, which usually includes a careful analysis of your finances, your business experience, and your willingness to accept all their rules and regulations without question.

Most franchise fees can run into the tens of thousands of dollars, plus you will have to spend additional money for equipment, supplies, and a location from which to operate – unless you are involved in a mobile business (which still probably requires a dedicated vehicle or two) or one you work from home

Some of your earnings every month will go toward a license fee, payable to the home office, and you may also be required to share some marketing expenses.

There are rules.

Business Opportunity Benefits

You will generally spend less money to acquire a business opportunity than you would a franchise opportunity. By definition alone, there is no upfront franchise fee, plus you usually keep all of your revenue rather than paying ongoing franchise or royalty fees.

You are free to choose any business name you like, and even branch out into other areas as you see a need in the community. For example, if you purchased a hamburger fast-food franchise, you could only serve the items on the “approved” list. By buying a business opportunity, if you liked pies, you could sell whatever kind of pie you wished.

You are also able to operate pretty much anywhere without fear of stepping on someone else’s toes. Franchises can have some very strict territorial guidelines. This is what most people think of when they imagine operating a business.

The Downside to Business Opportunities

The acquisition of a business opportunity rarely gives you the option to use trademarks, brand names, or other elements readily identifiable to the buying public. The freedom you have to do things your own way also means your chances of success rest entirely in your ability to run a business.

There is no home office support, no massive buying power for equipment, inventory or supplies, and no other business owners to consult when you’re faced with an issue that needs to be resolved. In a very real sense, you are on your own.

Final Thoughts

In many respects, deciding between a franchise and a business opportunity comes down to two main factors – how much money you have to spend, and what kind of a personality you possess.

Rule-followers can become great franchises, while people who like to go off in their own direction – maybe not so much. Be sure to weigh all the factors before you decide which is best for you.

There is no right or wrong. Every person’s situation is different. Hopefully now though you know enough to determine if being a franchisee is an option you want to pursue or dismiss.

William Lipovsky owns the personal finance website First Quarter Finance. His most embarrassing moment was telling a Microsoft executive, "I'll just Google it."

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