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The Small Business Franchise

The Small Business Franchise

Author: James Howard

Determine the advantages or disadvantages of owning a franchise.

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Hello, and welcome to this tutorial on small business franchise. So I'm going to ask you one more time-- have you ever thought of opening your own business? And if so, have you ever thought about opening a franchise, like McDonald's or Dunkin' Donuts? Well, in this lesson, what we're going to be looking at is franchising. We're also going to be taking a look at franchising as an option versus opening your own business. We're going to look at the rise in franchising, and franchising versus multi-level marketing. The key terms we're going to be using in this lesson are franchise and multi-level marketing.

So a franchise is defined as a type of business in which one organization pays to use an established business model and intellectual properties. Now, starting a business from scratch can have its advantages and disadvantages compared with franchising. Starting from scratch allows the owner to realize his own ideas. You're not limited to what the franchise tells you you can or cannot do. However, you have to develop relationships with other stakeholders, suppliers, customers, and such, and funding can be pretty hard to get at the beginning.

Franchising brings established customer base with it. There's a recognizable name, and there are certain expectations you get from customers, and it's going to be positive or negative depending on the franchise. Funding also is much easier, because the numbers can be shown to the bank on what other franchises have done, and it's an established name.

Now, franchising as an option gives a license to operate an individually owned business. These are businesses like McDonald's, or H&R Block, Ramada Hotels, Papa John's Pizza. The franchisee is a person who buys and operates this franchise as their own business. The franchiser is the one who sells the opportunity to use that franchise' name and business model.

And of course, there are pros and cons with every business option. In this case, a franchise brings in a proven business model, and it also has support from the home office. Big cons are the costs that are involved with opening can be very, very expensive, high start up costs, and there's a lack of freedom on the part of the franchise owner.

There are different types of franchises. Now, one type of franchise is a manufacturer that offers the sale of a particular item. What they'll do is offer that particular item for sale with a limited number of people within a certain geographic area, and only those people are allowed to sell that particular item. Some examples would be your local gas station is authorized to sell that particular brand of gas at their gas station. Also, car dealerships follow this model.

Another one is a producer who licenses to a distributor. Think Coca Cola. Coca Cola doesn't own all the bottlers around the world. The bottlers are owned by individual companies and are franchised to license that product and sell it on Coke's behalf.

Another type is for franchises to supply a name and supplies, but not the actual product. Now, McDonald's is an example of this particular type of franchise. It sells the name. It sells you the supplies to make the product, but they don't make the actual product. You make the actual product on site and sell it.

There's been a dramatic rise in franchising, and they've really gained in popularity. In fact, there are a high number of women and minorities who are involved in franchising, and there are outreach programs there for these two demographics. There are also dual branded franchises out there. For instance, Long John Silver's Restaurants and KFC. You have one location with two different franchises at the same location. This increases your customer base and hopefully generates greater sales, but it also increases the cost of ownership and startup. Now, just because you have a franchise and it's an established name doesn't mean you're guaranteed success. There are no guarantees in the world of business.

Franchising versus multi-level marketing. Well, first of all, we need to look at what multi-level marketing is. It's simply defined as 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. Now, there's some debate on some forms of franchising versus multi-level marketing. An example that's been in the news lately has been Herbalife. They're are multi-level marketer that also franchises business opportunities, and they're become very successful. But now they're being sued because of a hedge fund bet that was made in 2012. The real money here is made not by selling the actual product, but by over sellers. In other words, the primary way you make money in a multi-level marketing strategy is by recruiting other sellers to sell the product, not actually selling the product yourself. And in a multi-level marketing strategy, the people who recruit take a portion of the sales that the people below them sell.

So to recap, we looked at franchising and franchising as an option versus opening your own small business, the pros and cons associated with that decision. We looked at the rise in franchising, and the outreach programs out there, and how there's a large number of women and minorities involved in franchising. And lastly, we compared franchising with multi-level marketing.

I want to thank you for spending some time with me today, 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.