Many people dream of being an entrepreneur. But starting a business from scratch with a business plan, investors, and the legal issues associated with a new business can be intimidating – especially for people who have limited resources or business experience. Purchasing and operating a franchise is an alternative way to fulfill an entrepreneurial dream. Franchising is sometimes described as a way to go into business for yourself, but not by yourself.
Here are some facts and figures about franchises that may surprise you.
- In the year 2000, there were 320,000 franchised small businesses in 75 industries.
- Franchises were said to account for more than 40 percent of all United State retail sales.
- About one out of every 12 retail business establishments is a franchised business.
- It is estimated a new franchise outlet opens somewhere in the United States every eight minutes.
In this lesson you will learn how franchises operate, including their pros and cons. You will then be asked to make two decisions. You will first consider whether you are better suited for starting a business from scratch or through a franchise. You will also select a franchise opportunity that you think would be an appropriate new business that you might start in your local community.
Activity 1: What is a Franchise?
Franchising is defined by state and federal laws as a business relationship between two parties which gives:
- a person or group of people (the franchisee) the right to sell a product or service using the trademark or trade name of another business (the franchiser)
- the franchisee the right to market a product or service using the operating methods of the franchiser
- the franchisee the obligation to pay the franchiser fees for these rights
There are two general types of franchises. Product distribution franchises simply sell the franchiser’s products - these are supplier-dealer relationships. The franchiser licenses its trademark and logo to the franchisees but typically does not provide them with an entire system for running their business. The industries where you most often find this type of franchising are soft drink distributors, automobile dealers and gas stations. Some well-known product distribution franchises are Pepsi, Ford Motor Company and Exxon.
Business format franchises, not only use a franchiser’s product, service and trademark, but also the complete method for conducting the business, such as the marketing plan and operations manuals. Examples of business format franchises include MacDonald’s, Taco Bell, Radio Shack, Marriott Hotels, Jenny Craig International, H&R Block, Midas International, Barbizon School of Modeling, Century 21 Real Estate, and 7-Eleven.
Although product distribution franchising represents the largest percentage of total retail sales, business format franchises are the most common type of franchise. Most franchises opportunities available today are of the business format type.
Activity 2: Franchise Pros and Cons
Imagine you want to start your own business. Drawing from the information in the articles below, write a paragraph that tells which would be better for you – investing in a franchise or starting a business from scratch. Give at least three reasons for your choice. Regardless of your decision, there will probably be a down side – few choices are all positive or negative. State one of the negatives. When you are finished, give your work to your teacher.
Choosing the Best Business to Buy
Should You Buy a Franchise? (Advantages & Disadvantages)
Activity 3: Selecting a Franchise
The Franchise Zone has an online directory and provides background information on hundreds of franchise opportunities. You may choose franchises from the same industry or two different industries. Keep in mind the franchise should be something you think you would enjoy and be good operating. A business must also be profitable – you will want to find franchise opportunities that you think will succeed financially.
Record your two choices and what you learn about them on this worksheet. A list of questions is provided to remind you of points that all investors should consider when selecting a franchise.
HINT: If you need more information about a specific franchiser, a company web address is usually provided in the Franchise Zone directory. Use this address to go to the company web site then look for a franchise or business opportunity link on the company site that provides more details.
If you want to be an entrepreneur but starting from scratch doesn’t seem right for you, investing in a franchise may be the path to choose. By purchasing a franchise, you can offer an established brand name. Good franchisers will help you succeed – offering training and support. In some cases, they will even help you get the money you need to buy the franchise. Of course, franchises also have their drawbacks. You will have to operate according to the rules established by the franchiser. And any problems the franchiser has may become your problems.
Another issue addressed in this lesson is how to know which franchise is right for you? When selecting a franchise, here are some broad questions that must be considered:
- Do the franchise and its brand have a reputation for quality?
- Is the franchiser willing and able to help you succeed?
- Is there a demand for the product or service you will be selling?
- Who are your competitors and will you be able to compete with them?
Keep in mind that starting a franchise, like any other investment, is a risk. Success is never guaranteed. Some of the features of the franchise such as the established reputation of the product or service you are selling and the support of the franchiser can reduce the risk for the franchisee BUT there is still a need to be cautious and investigate the opportunity carefully before getting involved.
Assessment for this lesson will be based on the writings and worksheet from Activities 2 and 3. After each activity complete the assigned worksheet/writing and turn it in to your teacher.
1. Throughout this lesson you have focused on the franchisee. Have you ever thought about why someone would want to be a franchiser? You can find one of the reasons in the history of Subway
– the chain that makes submarine sandwiches. One of today’s most successful franchise operations, Subway was started by a teenager!
2. Most people think a franchise is the same thing as a business opportunity. But in the eyes of the law, they differ in some respects. . Read about how they are the same and how they are different. Record your findings on this Franchise or Business Opportunity worksheet. These three articles are a good place to start gathering the information you will need.
a. Different Worlds : How to choose between a franchise and a business opportunity
b. Franchise vs. New Business