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The Small Business Franchise

The Small Business Franchise

Author: Jeff Carroll

Determine the advantages or disadvantages of owning a franchise.

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Source: Image of female in suit, male in suit, stickperson, curved arrow, hammer, 50 dollar bill, images by Video Scribe, License held by Jeff Carroll; Image of McDonalds Logo, Public Domain,; Image of Papa John’s logo, Public Domain,; Image of Chevrolet logo, Public Domain,; Image of Coca-Cola logo, Public Domain,; Image of Subway logo, Public Domain,; Image of Herbalife logo, Public Domain,

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Hi, I'm Jeff and in this lesson, we'll learn about the growing small business franchise market. So let's get started. First though, let's talk about the differences between starting an existing business from scratch versus buying an existing business. Starting a business from scratch allows the owner to explore their own ideas without adapting to an existing business model, but in order to do this, the new owner must form relationships with suppliers, customers, and any other stakeholders in the business. It may also be difficult obtaining funding from a bank since the new business has no financial history.

Buying an existing business means that banks can see the financial history, and if that history is strong, then funding might be easier. In addition, customers already exist who use the business, but those customers will also have expectations about how the business will be run. Sometimes that is a positive and sometimes those expectations conflict with the ideas of the new owner. An alternative to buying an existing business is licensing a franchise.

A franchise is a type of business in which one organization pays to use an established business model and intellectual properties. McDonald's and Papa John's are examples of franchises in the food industry. But franchises exist in every sector, such as Ramada Worldwide for hotels, and H&R Block for tax and accounting services. The franchisor, who is the seller of the franchise, gives a license to the franchisee, the buyer of the franchise, who can then operate as an individual business.

Some of the advantages to franchising are that it's a proven business model. If other franchises are successful, this can give a franchisee confidence that they are starting a business that will be profitable. The franchisor also provides support by giving the franchisee a known brand, business plans, and instructions on the operations of the business. One of the disadvantages is the costs associated with franchise licenses. In addition, the franchisee often lacks the freedom to vary the business model without violating the franchise license.

There are three major types of franchises. In the first, a manufacturer authorizes a number of retail stores to sell a certain name brand item. For example, car dealerships, such as Chevrolet or Ford, operate off this franchise model, so do gas stations, such as Chevron. In the next type, a producer licenses distributors to sell a given product to retailers. Examples of this are Coca-Cola and PepsiCo, who authorizes distributors to sell their soft drink products. Franchises that sell beverages and supplies to bars and restaurants are often in this model, and since these franchises may not require a store front, some franchisees use home-based offices.

In the final franchise type, a franchisor supplies the name, the supplies, and other services instead of the actual product. In this case, the product is often created or provided on site by the franchisee. Examples include McDonald's, where the food is produced on site, Aamco Transmission, which provides car repair services, and cruise and vacation planners, such as American Express Travel. There has been a rise in the popularity of franchising, perhaps because of the importance of a trusted brand. High numbers of women and minorities have turned to franchises as a way to launch a new business.

And some organizations and franchisors have developed outreach programs to encourage these groups. Also, you may have seen examples of a Taco Bell combining with a Long John Silvers, or other restaurant franchises combining with gas station franchises. This is an example of a new trend called dual branded franchises. Keep in mind though that a franchise is no guarantee of success. Starting any small business is a risk.

One riskier method might be launching a multi-level marketing business instead of a franchise. Multi-level marketing is a type of business where people are compensated not only for their own sales, but also earn a percentage of what they're recruited sales people sell. More money is made when you bring in new members who start their own multi-level marketing businesses. This can be referred to as a pyramid scheme by those who don't admire this type of business.

Herbalife is an example of a multi-level marketing group. They sell weight loss and skin care products and it employs over 7,000 people worldwide. One investor, a hedge fund manager named William Ackman, felt so strongly about the risk of Herbalife's business that he made a $1 billion bet that the company's stock would drop in price. So far though, this bet has not paid off well for Ackman.

OK, well done. In this lesson, we learned about the difference between starting or buying a small business. We discussed franchises and what they are and the advantage and disadvantage franchises offer. We went over the different types of franchising and the popularity of franchising, and we compared multi-level marketing to franchises. Thanks for your time and have a great day.

Terms to Know

A type of business in which one organization pays to use an established business model and intellectual properties.

Multilevel Marketing

A type of business where people are compensated not only for their own sales but also earn a percentage of what their recruited salespeople sell.