Purchasing a Franchise Vs. Starting a Business in Arizona

When you’re looking for the freedom of running your own business in Arizona, you might be considering purchasing a franchise vs. starting a business. Each option has its own positives and negatives as well as differences in terms of ownership, control, branding, and ongoing obligations. 

It is important to consider your business and financial goals before moving forward on one or the other path. The following blog can help you understand your options so you can experience success.

Purchasing a Franchise Vs. Starting a Business: What’s the Difference?

What it Means to Purchase a Franchise

Buying a franchise in Arizona can be a smart move for those that want a little structure while still maintaining their own business. A franchise lets you run your business with the following benefits:

• An established brand
• Proven business model
• Tried and true operating system
• Dedicated clientele

What it Means to Start Your Own Business from Scratch

When starting a business, you will be developing the brand, doing the marketing, creating the products, providing the service, building a customer base, and putting together an operating system that supports long-term growth.

You will have freedom and the independence to make decisions and changes and to build your brand. A startup can mean independence and freedom to create and build your empire. 

Franchise vs. Startup: Key Legal and Financial Differences at a Glance

Franchise:

• Brand: Works under an established brand
• Startup Costs and Fees: Pays an initial franchise fee and ongoing royalties
• Operation Control: Follows franchise operating systems
• Risk and Support: Training, systems, and ongoing support provided through franchisor
• Marketing: Provided marketing based on national or regional brand guidelines
• Pricing, Vendors, Business Model: Must follow certain restrictions on products, pricing, and suppliers
• Legal Agreements: Governed by franchise agreement and federal and state franchise laws
• Customer Base: Brand recognition helps already established customer base

Business From Scratch:

• Brand: Creates and builds its own brand
• Startup Costs and Fees: No fees, but may have initial startup costs controlled by owner
• Operation Control: Full control over operations and policies
• Risk and Support: Responsible for training and other business systems and how they run
• Marketing: Creates own marketing strategies
• Pricing, Vendors, Business Model: Flexibility to choose vendors, pricing, products, and business model
• Legal Agreements: Governed by general business, contract, and employment laws
• Customer Base: Must build customer awareness through brand promotion and trust

Starting Your Own Business in Arizona: Pros and Cons

Benefits of Starting a Business from Scratch- Control, Branding, and Profit Flexibility

When you have a vision, goal, and values that you want to instill into a business, starting from the ground up can provide this opportunity. While it can create uncertainty compared to buying a franchise in Arizona, 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

Drawbacks of Starting a Business: Higher Risk, 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 such as buying a franchise in Arizona. 

Legal Steps to Start a Business in Arizona

There are certain legal steps business startups must follow for success. A skilled Arizona business attorney can help walk you through these steps to ensure compliance with state laws, protect your personal assets, and more. However, it helps to be aware of the legalities. 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

Purchasing a Franchise in Arizona: Pros and Cons

Benefits of Buying a Franchise- Brand Recognition, Support, and Easier Financing

Buying a franchise in Arizona is another path towards owning your own business with positives and negatives. The benefits of a franchise include:

• Higher chance of success since the practices are tried and true
• Easier to get financed. Lenders already know your business will likely be successful so it’s less risky to invest.
• Extra support from the franchise including purchasing power, legal help, developmental research, 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.
• Less opportunity to make mistakes since the franchisor will give you a proven business model.

Drawbacks of Buying a Franchise- 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 Has Over Your Business

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

Reviewing the Franchisor Disclosure Document Before You Buy a Franchise

What the FDD is and Why it Matters when Purchasing 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:

• Initial and ongoing fees
• Estimated startup costs
• Territory rights
• Training and support
• Restrictions
• Renewal, termination, and transfer provisions
• Financial performance representations
• Litigation and bankruptcy history

Key FDD Sections 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. Your Arizona business attorney can ensure you understand your rights and obligations. 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 franchisemeets your financial goals. They will point out potential warning signs, and will make sure you ask the right questions before you commit.

Franchise vs. Startup Costs: Comparing the Investment

Upfront Costs of Purchasing a Franchise in Arizona

One of the top factors in purchasing a franchise vs. starting a business is cost. Depending on the brand, industry, and business model, upfront costs could range from a few thousand dollars to several million dollars. Franchise fees are just the beginning of the startup costs.

Many people do not realise that when they buy a franchise, they are also responsible to cover rent for the location, purchasing products, paying for business licenses, and covering the costs of any other starting business operations and expenses. 

Startup Costs and Funding Options for Starting Your Own Business

Startups are much more risky than franchises, especially when it comes to investments. Many lenders are more hesitant to invest in a startup because of the risk. However, there are still plenty of ways you can find funding.

The startup costs you will face depend on what path you are taking, but in general you should plan on paying for the following:

• Business registration and license
• Equipment and tools
• Inventory
• Office or retail space
• Website and branding
• Insurance
• Marketing and advertising
• Professional services like accounting
• Payroll

Franchise or Startup: Which 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. They look at the historical performance data from the other locations which can give them confidence.

If you want to finance a startup, looking for loans from friends and family who believe in you and your business goals can be a great way to start. While traditional lenders may be more hesitant to provide a loan, with the right information and business plan, they can be a great option as well. Talk to an Arizona business attorney about putting together a plan to find financing. 

Legal Considerations Before You Start a Business or Buy a Franchise

Business Entity Formation and Liability Protection

Forming the entity is an important decision because it 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 structures you can choose from are a sole proprietorship, limited liability company, corporation, or partnership. Talk to an attorney before you choose to make sure the structure fits your goals and protects your personal assets! 

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. Business contracts you should consider include:

• Business formation documents 
• Commercial leases
• Vendor and supplier contracts
• Employment agreements
• Customer contracts
• Equipment leases and financing agreements

If you are buying a franchise in Arizona the contracts and agreements you will need to review and sign include the franchise disclosure document, the franchise agreement which is legally binding, and a commercial lease for the location you use, if applicable. 

Protecting Your Brand: Trademarks and Intellectual Property

Your brand, name, logo, designs, and creative work are an important part of your business that must be protected. Doing so means you need to create a trademark, copyright, or patent. You can do this by working with your local lawyer to make sure your ideas are original.

From there, your lawyer can do the proper paperwork to secure and protect your intellectual property. Doing so ensures your brand is recognizable and trustworthy. When it comes to a franchise, the franchisor will do this important work for you. 

How to Decide: Purchasing a Franchise or Starting Your Own Business

Questions to Ask before Choosing a Franchise or a Startup

Purchasing a franchise vs. starting a business in Arizona is a big decision. You will need to evaluate your goals and financial abilities to make the right decision. Some questions you should consider asking before making a decision include:

• What are my goals?
• How much money can I invest?
• How much risk am I comfortable taking?
• How much independence do I want?
• What experience do I have?
• How important is brand recognition?
• What kind of work do I enjoy?
• How much support do I want?
• What are my financial expectations?
• What is my exit plan?

Matching the Right Path to Your Goals, Budget, and Risk Tolerance

To step towards success when you’re deciding between a startup and a franchise is to consider your goals, budget, and risk tolerance. There are benefits and drawbacks to each path, but with the help of an Arizona business attorney walking you through the details of your situation, you can make an informed decision that sets you on the path to success.

Deciding Between a Franchise and a Startup? Talk to an Arizona Business Attorney

If you are thinking of purchasing a franchise vs starting a business in Arizona, there are a lot of decisions ahead of you. Our lawyers are prepared to stand by your side from the very beginning. 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 at Denton Peterson Dunn to get started towards your exciting new future.