As an MBA graduate who has always dreamed of being an entrepreneur, I am excited to start my entrepreneurial journey. But when it comes to ETA vs franchising, which right path gets you there faster, smarter, and with fewer sleepless nights?
Let’s talk about two of the most popular roads:
- Entrepreneurship Through Acquisition (ETA)
- Franchising
Although both paths provide the opportunity to become a business owner and grow a business, they were created for two distinctly different types of entrepreneurs. Each approaches business differently and has a varying level of comfort with risk, structure, and ongoing support.
What is ETA?
Entrepreneurship Through Acquisition (ETA) is all about buying an existing company. It sounds glamorous, and for some, it absolutely delivers. Here’s the value proposition:
- You are walking into an organization with employees, customers, revenue, and established operational systems.
- There will be no chaos associated with startups, and instead, you will jump straight to operating your new business.
- This type of organizational structure also lends itself well to quick scaling as long as you have brought the correct skill sets to the table.
But here’s the catch: ETA is both high risk and high reward. It may take months or even years to find the right acquisition, which results in significant lost opportunity.
In addition, finding an acquisition generally involves raising money from investors using seller financing or obtaining large amounts of debt from banks. This can increase the risk to your financial stability.
Once the ink is dry on the agreement, you inherit all of the pre-existing issues with the previous independent business. These can include antiquated systems and poor processes, low employee morale, etc.
What is Franchising?
Franchising provides a more defined and supported path toward becoming a business owner. This is especially beneficial for smaller business owners looking to expand using a time-tested method. You are essentially purchasing a portion of a successful and established business model.
This means you receive the benefit of the previous entrepreneur’s trial and error. The operational processes, including marketing, have been developed and implemented by someone else.
Benefits include:
- A tried-and-true business model that has streamlined all aspects of operation.
- Established branding that will provide traffic to your door on opening day.
- Existing marketing efforts, including possible national advertising for your new location.
- Ongoing training, assistance for hiring, leading, etc., for growing your business.
- Additionally, there are many other forms of support available to franchisees through their franchisor.
While an ETA is for visiting a country with no royalty fees, a franchise business involves a franchise fee and recurring royalties.
Unlike ETAs, the franchise model offers more stability and predictability. It is also expected to grow at nearly double the rate of the U.S. GDP.
ETA vs. Franchising: Head-to-Head
Risk
ETA: This is one of the highest risks. Any acquisition involves taking on some amount of debt and there are no guarantees when it comes to operating an acquired business. If this business does poorly, if the integration is poor, then you have lost money.
Franchising: Lower risk than acquiring. You’re buying into a successful concept. The franchise system provides guardrails and a proven model that reduces the chance of failure.
Support
ETA: Very little. Once you’ve made the purchase, you’ll be responsible for all aspects of supporting the operation. Advisors can provide guidance throughout the due diligence process.
However, after the acquisition, the advisor’s role typically ends and now it’s solely upon you as the new owner to provide the necessary support.
Franchising: More support than you would ever want.
Franchise owners receive support from the franchisor in all aspects of the business, including hiring, training, advertising, and promotions. They also connect with other franchise owners in the same system to learn from each other.
Stability
ETA: Extremely varied based on what type of business you purchase and whether or not you’re able to correct outdated systems in that business.
Franchising: Much greater predictability. Established franchises have a defined revenue model and an existing customer base, which allows for consistent revenue streams.
The consistency provides better clarity regarding your cash flows, as well as making it easier to create a long-term plan for your finances.
Growth Potential
ETA: Great potential for fast business growth if the correct acquisition takes place. There is also a great opportunity for a large profit on sale.
Franchising: Consistent and scalable. Many franchises provide options for multi-unit franchise ownership, facilitating long-term expansion from one location to many.
Who’s the Right Fit?
Franchising Fits If You:
- Focus on getting things done that you like to execute.
- Like to have a clear process for your business and others.
- Think of it as having a coach who will help you make decisions or handle problems when they come up.
ETA Works If You:
- Thrive in ambiguity
- Thrive in ambiguity
- Thrive in ambiguity
Financial Goals and Risk Tolerance
In comparison to ETA, there is less of an initial cash outlay required for franchising. You will pay the initial cost to purchase the rights to use the franchise brand name and join the franchise system. However, the roadmap you follow is much more defined than with ETA.
Banks tend to be more comfortable financing franchises, as banks understand that there is a greater level of security involved with brand equity and existing track records of performance.
Long-Term Objectives
ETA: For those who want rapid expansion of their business and a high-value exit – this is a sprint and a marathon.
Franchising: The right choice for those who are looking for steady and predictable income through stable operations and long-term valuation. A typical path begins with opening one unit and then expanding to multiple locations over several years.
Some entrepreneurs will buy an existing franchise, which gives them a solid base from which they can operate, including established customer relationships, employees and revenue.
This model can easily scale into large businesses as you open more than one franchise in multiple areas or multiple brand names, creating your own empire.
Why Franchising Might Be the Smarter Play
Let’s be blunt, many franchises work because the proven playbook is already written. You aren’t just fast food, you are part of a strong brand.
Franchisees benefit from:
- Trust is built very quickly through the power of an established brand.
- The entire process of getting started will be supported through the franchise system.
- A group of people or other franchisees who have gone through this same process and have experience to share with you.
- Business owners can use various marketing, operational, and technological tools designed to help grow their businesses.
While independent business ownership can provide many advantages, it also provides isolation, guesswork, and potential loss. When you buy into a franchise, you own the business – but you do so without having to go at it completely on your own.
FAQs
Entrepreneurship through acquisition (ETA) means buying an existing business instead of starting one from scratch.
The new owner inherits a customer base, an established employee group and current income so they may be able to focus on developing or expanding the business rather than just keeping it alive.
Businesses that use ETA and businesses that are franchised have one thing in common. They allow individuals to be their own bosses. The journey, however, could not look much more different.
*ETA gives you full control, flexibility, and potentially higher returns – but also higher risk and responsibility.
*Franchising offers a proven business model, brand recognition, and ongoing support from the franchisor.
This is a structured business development option that has fewer risks associated with it, making it perfect for entrepreneurs who wish to develop a successful business using a tried and tested method, rather than developing a new idea themselves.
A franchise provides stability and predictability. You are purchasing a well-established business model that has an existing brand name, operational systems and training.
Acquiring a business (eta) will give you all of the same positives as owning a franchise but also inherit its negatives.
The success of the business will depend on how much research you have done before making the purchase, what type of financing was used to make the acquisition, and if you can effectively manage through changes.
For graduates of MBA programs who want to take their skills and apply them, both paths can lead to success, independent of each other. It is your personality and goals that will determine which path you should choose.
Choose ETA if you love strategy negotiation and high-impact leadership. This path is perfect for those who have a vision of buying, growing and eventually exiting a business.
Go for franchising if you like a roadmap, proven systems and the backup of a strong brand. This path is ideal for entrepreneurs who want to scale sustainably while minimizing trial and error
Start by asking yourself three questions:
*Do I have a high-risk tolerance?
*Am I willing to spend money for capital to use to get started?
*Do I want the flexibility of being my own boss but having less support as an entrepreneur, versus wanting the structure and support from others?
You should then talk with franchisors, look into ETA investors, and interview current business owners using either model. Your best path depends on whether you want independence and high risk (ETA) or guidance and proven stability franchising.
Next Steps
Not sure where to start? Begin by asking yourself tough questions about your financial goals and how much capital you can invest.
- Research.
- Ask for advice from consultants who specialize in franchises.
- Find and talk to existing franchise owners.
- Attend "Discovery Days" at each franchise.
- Evaluate the overall franchise model along with the cultural values of the franchisor.
Choosing between entrepreneurship through acquisition and a proven business model is a major career milestone. Don’t navigate the complex world of unit economics and due diligence alone.
Franchising may be a smart path to creating a successful business. However, it will not solve all of your problems. The opportunity exists for you to build a strong, sustainable and profitable business when you select the correct franchise.
Once you have selected the franchise brand that fits your needs, it could potentially provide the quickest route to achieving the lifestyle you desire.
Contact FranchiseCoach today to get expert guidance on finding the franchise opportunities that align with your vision. Let’s turn your MBA expertise into a thriving business empire.
