Having conquered the little voices of negativity in your head about leaving your job and starting your own business, you find yourself on a new horizon deciding whether you will invest in your own business (creating, developing and marketing your own product or service) or invest in a franchise that already has a proven product, service and system. On the surface it seems that investing in your own start-up will be the least expensive and that the barriers to entry into franchising (franchise fee and advertising fee among other expenses) are insurmountable.
Short sightedness will reveal every time that it’s better to start your own business. The sharper and more analytical long range view may paint a different investment picture. Does it cost more to buy a franchise or start one’s own business?
The path of least financial resistance seems to align with starting your own business. Statistics will show that things take longer, cost more, and be more difficult than originally anticipated. Traditional business start ups often take 3 or more years to reach break even. When adding up all of the cost to get to break even over that period, we must consider looking at some of the lost opportunity costs and cash outlays for the business:
1) I gave up my $60K job for 3 years, lost opportunity cost of $180K plus 3 years of benefits
2) I spent $25K creating my product and $25K building my inventory
3) I spent $15K developing my web site and customizing my software and collateral
4) I spent $2.5K per month in rent for 36 months totaling $90K
5) I spent $1K per month for phones, electric, HVAC, for 36months totaling $36K
6) I spent $85K on payroll per year for a three year total of $255K
7) I reached break even in 3 years with a total effective cost to me of $626K
Looking at the franchising route for the same type of business where break even can easily occur in 1 year, the argument can be made for the following lost opportunity costs and cash outlays for the business:
1) I gave up my $60K job for 1 year and paid a $33K franchise fee to get into a franchise
2) I paid a $100K for initial training, build out and inventory, all occurring before I opened
3) I did not have to create my product, web site, collateral or customize my software
4) I spent $2.5K per month in rent for 12 months totaling $30K
5) I spent $1K per month for phones, electric, HVAC, for 12 months totaling $12K
6) I spent $85K on payroll per year for 1 year
7) I reached break even in 1 year with a total effective cost to me of $300K
These numbers are for illustrative purposes only and are very skeletal. There are certainly many more expenses you can apply, but I think you can see that reaching break even at the end of year 1 is much more exciting than reaching break even at the end of year 3. Every other expense that you can think of (insurance, marketing, legal, accounting, etc.) magnifies the difference between dollars spent breaking even in year 1 versus year 3. This is why breaking even sooner rather than later is so important in new business start ups. Look for subsequent discussions to know why franchise businesses typically break even years before traditional start up businesses.
Second in a series of 8 posts by Al McCooey, President of Summit Franchises and a franchise consultant who helps clients identify excellent fitting franchises that they will enjoy operating and have the opportunity to be highly successful at. Learn more about Al and franchising at http://www.summitfranchises.com. Next week: Advantages/Disadvantages of Owning a Franchise.