Franchises and independent startups each have their own costs, risks, and rewards. Here’s a quick breakdown to help you decide:

• Franchises: Higher upfront investment ($10K–$5M), ongoing fees (royalties 4–20% of sales), but offer proven systems, brand recognition, and support.

• Independent Startups: Lower initial costs (avg. $40K), more flexibility, and no royalties, but require building everything from scratch, including branding and customer base.

Quick Comparison

Key Takeaways

• Choose a Franchise if you want a tested business model with support but don’t mind paying ongoing fees.

• Choose an Independent Business if you prefer full creative control and have the patience to build from scratch.

Keep reading for a detailed cost breakdown and actionable steps for both options.

Franchise vs. Startup: Which Makes More Money?

1. Franchise Costs

Franchising involves two main types of expenses: initial costs and ongoing fees.

In the U.S., the average franchise investment is around $150,000. However, costs can range significantly - for instance, starting a McDonald's franchise can cost between $1.3 million and $2.3 million, while home-based franchises often require much less.

Here's a breakdown of cost ranges across different industries:

Service-based franchises tend to have lower startup costs. For example:

• Stratus Building Solutions: $4,000–$80,000

• Jan-Pro Cleaning and Disinfecting: $5,000–$58,000

Affordable options also exist in the travel industry. Both Dream Vacations and Cruise Planners require less than $22,000 in initial investment, with royalty fees of 1-3% of gross sales.

Recurring Expenses

Franchise owners also face regular costs, including:

• Royalty Fees: Typically 4-20% of gross sales

• Marketing Contributions: Around 0.5-4% of revenue

• Operating Capital: To cover expenses before reaching profitability

• Equipment and Inventory: For maintenance and restocking

• Staff Training: Employee development costs

The U.S. franchise market is vast, with over 806,000 establishments across more than 3,000 brands. Whether you're interested in a mobile business or a retail operation, there are opportunities to match a range of budgets and goals. This detailed breakdown helps you decide if franchising fits your financial plans.

2. Independent Business Costs

Starting an independent business involves careful planning for both initial investments and ongoing expenses. On average, small business owners spend about $40,000 to get started, though simpler setups may only require around $12,000.

Initial Setup Costs

Here’s a breakdown of common startup costs:

For physical locations, property-related costs can be a major factor:

• Property Purchase: $127–$300 per square foot

• Rental Space: Around $22 per square foot annually

• Utilities (700 sq. ft.): $200–$1,150 per month

Monthly Operating Expenses

Ongoing costs vary depending on the business type and size. Typical monthly expenses include:

Return on Investment (ROI)

Small business ROI typically falls between 25% and 50%, with valuations often calculated at two to four times Seller's Discretionary Earnings (SDE). Jacob Orosz, President of Morgan & Westfield, explains: “In the world of business valuation, ROI is the inverse of a multiple”.

Growth plays a crucial role in increasing business value. For instance:

• A business with 5% annual EBITDA growth could achieve a 38% ROI by year five.

• A business with 20% annual EBITDA growth might see a 176% ROI within the same period.

Cost-Saving Strategies

To manage costs effectively without compromising quality:

• Use shared office spaces to cut overhead expenses.

• Opt for DIY website builders instead of hiring professional designers ($15–$50/hour).

• Start with only essential equipment and upgrade as the business grows.

• Regularly review and negotiate supplier contracts.

• Track monthly expenses to identify areas for savings.

These cost considerations highlight the financial independence of starting your own business, giving a clear picture of the challenges and opportunities that come with it.

Benefits and Drawbacks

When comparing franchises and independent startups, there are clear differences in costs, risks, and profitability. Let’s break down these contrasts to help you make an informed choice.

Financial Success Rates

Data shows that 92% of franchises stay open after two years, with 85% surviving beyond five years. Independent businesses, however, face tougher odds: 25% close within the first year, and of those that remain, 50% shut down within five years. Only 30% survive for ten years. These stats highlight the stability franchises often provide compared to independent ventures.

Cost Structure Comparison

These differences shape the financial realities of each model.

Key Financial Advantages

Franchise Benefits:

• Faster profitability thanks to proven systems

• Bulk purchasing power with established vendors

• Easier access to financing due to lower risk perception

• National marketing support included

Independent Business Benefits:

• No franchise fees, allowing for higher profit margins

• Flexibility to adjust pricing and operations

• Lower startup costs, especially for service-focused ventures

• Full control over decisions and growth strategies

Expert Insights

Lance Sinclair notes:

"At the end of the day, lower costs and competitive pricing lead to healthier profit margins, contributing to the overall success and sustainability of the franchise."

Risk Considerations

Franchise Risks:

• Ongoing royalty payments eat into profits

• Limited freedom in how you run the business

• Restrictions on location choices

• Reliance on the franchisor’s performance

Independent Business Risks:

• Higher marketing costs to build a brand

• Slower path to profitability

• Greater exposure to market changes

• Full responsibility for growth and strategy

Understanding these risks will help you weigh the costs and rewards of each model based on your long-term goals.

Summary and Next Steps

Here’s a quick breakdown of key investment factors and actionable steps to guide your decision-making.

Investment Overview

These figures outline the financial commitment required, helping you plan effectively.

Financial Planning Steps

For a closer look at costs, revisit the earlier breakdown of expenses. Here are the key steps to keep in mind:

1. Evaluate Your Capital
   

   Your budget will shape your choice. Franchises often demand higher upfront investments but come with established frameworks. Independent ventures, on the other hand, allow for more flexibility but may require careful scaling.

2. Review Funding Options
   

   Banks are generally more inclined to approve loans for franchises due to their established business models.

"Investing in a franchise provides a structured and proven business model. Franchisees benefit from established branding, operational systems, and support from the franchisor".

3. Calculate Total Ownership Costs
   

   For franchises, consider:

   • Initial franchise fees

   • Equipment and inventory

   • Ongoing royalties

   • Marketing contributions

   • Operating costs

   For independent businesses, factor in:

   • Startup licensing

   • Brand development

   • Marketing budgets

   • Operating capital

Making Your Choice

Using the steps above, decide which path aligns with your goals. Franchises offer established systems and support, while independent businesses give you more control but come with higher risks during the early stages.

Action Items

• Define your goals and assess your financial capacity

• Research franchise options that align with your interests

• Develop financial projections

• Consult a financial expert

• If pursuing a franchise, review franchise disclosure documents thoroughly

Follow these steps to apply the insights from this guide as you finalize your decision.

Related posts

• 7 Key Steps to Evaluate a Franchise Opportunity

• 10 Questions to Ask Before Buying a Franchise

• Understanding Franchise Disclosure Documents: A Guide

• First-Time Franchise Buyer: Due Diligence Checklist