Buying a Franchise Vs. Starting a Business in Arizona: Costs, Risks & Legal Steps
When you’re looking for the freedom of running your own business in Arizona, you may ask yourself, “is it better to buy a franchise or start your own business?” Each option has its own positives and negatives as well as differences in terms of costs, risks, and legal steps. Going into your decision with as much information as possible is the key to making the right choice for your personal goals, values, and capacity.
The following article can help you understand each option so you can make a decision that is sure to provide success.
What’s the Difference Between Buying a Franchise and Starting a Business?
What it Means to Buy a Franchise
A franchise is an option that lets you buy into an established business. Buying a franchise in Arizona can be a smart move for those that want a little structure while still maintaining some independence. You will be required to follow strict guidelines when it comes to products, equipment, and procedures, but you will benefit from a brand that is already tried and true.
What it Means to Start Your Own Business from Scratch
When starting a business yourself, you will be doing everything from scratch. From developing the brand to creating a product or service to doing the marketing to building a customer base, your work is cut out for you. However, you will have the freedom and independence to create and build your empire exactly as you wish.
Franchise vs. Startup at a Glance
| Franchise | Business From Scratch | |
| Brand | Established brand | Create and build own brand |
| Startup Costs and Fees | Pay an initial franchise fee and ongoing royalties | No fees, but may have initial startup costs controlled by owner |
| Operation Control | Follow franchise operating systems | Full control over operations and policies |
| Risk and Support | Training, systems, and ongoing support provided through franchisor | Responsible for training and other business systems and how they run |
| Marketing | Provided marketing based on national or regional brand guidelines | Create own marketing strategies |
| Pricing, Vendors, Business Model | Must follow certain restrictions on products, pricing, and suppliers | Flexibility to choose vendors, pricing, products, and business model |
| Legal Agreements | Governed by franchise agreement and federal and state franchise laws | Governed by general business, contract, and employment laws |
| Customer Base | Brand recognition helps already established customer base | Must build customer awareness through brand promotion and trust |
Starting a Business in Arizona: Pros, Cons, and Risks
The Upside- Control, Branding, and Profit Flexibility
When you have a vision, goal, and values, starting from the ground up can provide this opportunity. While it can create uncertainty, it can also give you a significant amount of flexibility and control. The benefits include:
- Brand flexibility
- Freedom in marketing
- Choosing suppliers
- Implementing business practices
- Ability to choose any path forward that aligns with goals
The Risks- Higher Failure Rate, Funding Hurdles, and a Steeper Learning Curve
While flexibility sounds amazing, a startup is not for everyone. There are certain challenges in startups that owners should be aware of before making an official decision. One of the biggest difficulties is that there is a much higher financial risk and it can take months or even years to become profitable.
Other drawbacks include not having an established customer base, difficulty obtaining funding from banks or lenders, the learning curve of trying and failing different business strategies before finding the right one, and the time it takes to build a reputation.
For some, the hurdles of starting their own business from scratch are well worth it. For others, they may want to consider alternatives.
Buying a Franchise in Arizona: Pros, Cons, and Risks
The Upside- Brand Recognition, Support, and Easier Financing
A franchise is another path towards owning your own business with positives and negatives. The benefits of a franchise include:
- Simpler beginning since everything is already laid out for you.
- Easier to get financed. History of success means less risk for lenders.
- Extra support from the franchise including legal help, training, and more.
- Recognizable brand that is already trusted and includes a loyal customer base.
- Minimal need for marketing as the parent company will do most of this.
- Proven business model that can help promote success.
The Risks- Fees, Royalties, and Limited Independence
A franchise can be a fantastic option for someone who wants more security and structure. However, franchises come with fees on top of having to pay for a space, purchasing equipment, obtaining inventory, and other startup expenses. You will also be required to pay ongoing royalties and marketing fees.
Those that own a franchise are also required to follow certain rules and operating systems set by the franchisor. They are restricted to certain suppliers and vendors and there is often a long-term contractual obligation. That said, a franchise can be the right option in many circumstances.
How Much Control a Franchisor Keeps
While the owner owns the business, the franchisor will be able to control how the business is run. They have a say in:
- Business hours
- Store layout
- Employee uniforms
- Customer service practices
- Approved products and services
- How a business is maintained and cleaned
- Marketing
- Pricing and promotions
- Technology used
Franchise vs. Startup Costs: What Each Path Actually Costs
Upfront Costs of Buying a Franchise
One of the top factors in buying a franchise vs. starting a business is cost. Depending on the brand, industry, and business model, upfront costs vary significantly. The one-time franchise fee is the biggest initial startup cost, but you will also be responsible for location rent, and purchasing products and equipment from approved vendors. Additionally, you will pay ongoing royalty and brand fees.
Startup Costs and Funding for Building From Scratch
Startups are much more risky than franchises, but the startup costs tend to be lower. The main business startup costs that you won’t have in a franchise include marketing, creating a website, trademarking a brand, and legal fees if necessary. Otherwise, costs will be up to you depending on what is needed to get started. It’s also helpful to note that you will not have any royalty or marketing fees to pay. All revenue will stay 100% within your business.
Which Path is Easier to Finance?
Generally, a franchise is easier to finance. Lenders will be quicker to provide loans to an established brand and customer base. The historical performance data from the other locations can give them confidence.
If you want to finance a startup, looking for loans from friends and family can be a great way to start. Traditional lenders are also a solid option, but require more detailed information. Talk to an Arizona business attorney about options.
Reviewing the Franchise Disclosure Document Before You Buy
What the FDD is and Why it Matters when Buying a Franchise
Before you invest in a franchise, one of the most important steps you should take is reviewing the Franchise Disclosure Document with the help of your Arizona business attorney. The FDD is required by federal law to ensure the prospective franchisee is as informed as possible before making the purchase. It includes 23 sections that cover information to help you make an informed decision. The sections include:
- Estimated startup costs
- Territory rights
- Restrictions
- Financial performance representations
- Litigation and bankruptcy history
Key FDD Items Every Franchise Buyer Should Review
The FDD is long, but provides necessary information. It is essential to review the entire document, but there are some key sections you should pay special attention to. Items 6 and 7 talk about the initial investment and ongoing fees; item 11 talks about the franchisor’s assistance, training, and support; item 17 talks about renewal, termination, transfer, and dispute resolution; and item 19 talks about financial performance representations.
Why an Attorney Should Review Your FDD Before You Sign
Purchasing a franchise is a big decision that should not be taken lightly. You should do your research and hire a lawyer to look over everything so there are no costly surprises. They will look over the contracts and agreements to make sure there is nothing unfavorable in them.
They can help you understand what you are able to do and if the franchise meets your financial goals. They will point out potential warning signs, and will make sure you ask the right questions before you commit.
Legal Steps to Take Before You Commit to Either Path
Choosing Your Business Entity and Protecting Yourself From Liability
There are certain legal steps a startup business must follow to ensure compliance with state laws, protect personal assets, and more. To start a business you must:
- Choose between LLC, Partnership, Corporation, or Sole Proprietorship
- Register business
- Get licenses and permits
- Create agreements, policies, and contracts
- Register for taxes
- Understand legal employee practices
- Protect intellectual property
You will need to register your business entity in both franchises and startups. The entity you choose determines whether or not you are personally liable if you default on loans within your business. It also determines how your business is run and structured. The business entities you can choose from are:
- a sole proprietorship
- Limited liability company
- Corporation
- Partnership
Whether you choose to buy a franchise or start a business, you will be dealing with important agreements and legal documents that should be drafted and reviewed with the help of a lawyer.
Contracts, Leases, and Franchise Agreements
Both franchises and business startups include contracts and legal agreements. However, the types of agreements and how flexible they are depends on which path you choose. Startup businesses will be handling formation documents and vendor contracts whereas a franchise will be working with the franchise agreement and franchise disclosure document.
Protecting Your Brand With a Registered Trademark
Your brand, name, logo, designs, and creative work are an important part of your business that must be protected. While common law protects your brand due to actual use, you can significantly strengthen the protection of your trademark by registering it with the federal government.
Work with your local lawyer to make sure your ideas are original and you take the necessary steps. Doing so ensures your brand is recognizable and trustworthy. When it comes to a franchise, the franchisor will do this important work for you.
Frequently Asked Questions ABout Buying a Franchise vs. Starting a Business
Is it cheaper to buy a franchise or start your own business?
Both a franchise and a startup have their own costs that make which is cheaper a toss-up. While starting your own business means you will be paying for your own marketing, operating systems, and brand-building, a franchise means franchise fees and ongoing royalties.
Do I need a lawyer to buy a franchise in Arizona?
You do not legally need a franchise attorney to buy a franchise, but it’s important to understand what to look for in a franchise disclosure document and franchise agreement since they are extensive and legally binding long-term contracts. Your lawyer can catch any hidden fees, severe exit restrictions, strict operational rules, and more.
How long do I have to review a Franchise Disclosure Document before signing?
According to the Federal Trade Commission, franchisors are required to provide the FDD 14 days prior to signing or any payment of fees. This protects the franchisee and gives them time to review the document before a commitment. SOURCE: https://www.ftc.gov/sites/default/files/documents/federal_register_notices/franchise-rule-16-cfr-part-436/991022franchis.pdf
Can I negotiate a franchise agreement?
A franchisor will likely tell you the terms of the agreement are strictly non-negotiable, but there is typically room to change certain aspects. While anything related to brand and operations is likely non-negotiable to ensure uniformity, buyers can often negotiate territory rights, initial fee structures, and cure periods.
Talk to an Arizona Business Attorney Before You Commit
If you are thinking of buying a franchise vs starting a business in Arizona, there are a lot of decisions ahead of you. You must determine which path fits your goals and what agreements, contracts, and documents must be reviewed before signing. Our lawyers at Denton Peterson Dunn have years of experience reviewing FDDs and franchise agreements for Arizona buyers as well as experience handling entity formation, employee contracts, and more for those starting from scratch.
With offices in Mesa, Scottsdale, and Phoenix, we will help you determine your goals, review your contracts, protect your rights, keep you aware of your obligations, draft agreements, and more.
Contact our law firm to get started towards your exciting new future.