Introduction
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. Part of being an entrepreneur is understanding the various ways in which a business can be started and structured. While we've previously discussed some of the advantages and disadvantages to starting a sole-proprietorship, partnership and corporation, the purchase and operation of a franchise is an alternative way to also 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.
Use this activity as a way to further introduce yourself to the potential ways in which you might structure your own business one day.
Task
Part 1: In this lesson, you will research the three basic types of business organization: sole proprietorships, partnerships and corporations. Considering the advantages and disadvantages of each, your team will function as consultants offering advice on which form of business is best suited for different business scenarios. The case studies all feature real- life entrepreneurs who started businesses producing chocolate candy and cookies—they all result ultimately in “sweet” success stories. Once you've made your recommendations, you will be provided the identities of your clients and asked to prepare reports that tell the rest of the story—what happened to each founder and business.
Part 2: 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.
Process
PART 1: Activity 1: Three Types of Business Organization
Additional information is provided below on several issues you will encounter during this activity or later in the lesson. Take the time to read aloud in your team and then proceed to the Small Business Planner website, to learn more about each type including their advantages and disadvantages.
Liability:
Students may not be familiar with the term “liability.” To help them grasp its importance, discuss specific circumstances in which liability could be an issue for sole proprietorships and partnerships. The most common situation is debts owed when a business experiences financial difficulties or fails. If a business is not fully insured, there is also the possibility of loss due to disaster (e.g., fire, flood) or lawsuits. Unlimited liability means that the owner’s personal assets can be used to pay for any debts of the business.
Finance Options:
A point to stress regarding corporations beyond the limits on liability is the fact that corporations have more options when they need to obtain additional financing. For sole proprietorships and partnerships, the only source of money is often personal assets. On rare occasions, they may be able to borrow money from family members, friends or a bank. Corporations have the option to issue more stock. Also corporations typically find it easier to borrow money – through loans from the financial markets (commercial banks, credit unions, insurance companies). And corporations can issue corporate bonds.
Tax Implications:
If students are not familiar with tax law, you may need to provide information about the tax implications of different forms of business.
Tax law permits corporations to deduct the full cost of employee benefits, such as medical insurance, thus reducing corporate tax liabilities. But sole proprietorships and partnerships are not permitted to deduct these costs directly from their business income (the costs may be partially deductible as an adjustment to income). For some business owners, this is a major disadvantage of the sole proprietorship and partnership forms of ownership.
Sole proprietors and partners pay individual income tax on their companies’ earnings. In contrast, a corporation is taxed as a separate entity that pays tax on its income. The stockholders also pay personal income tax on any dividends they receive. The effect is referred to as “double taxation” and in this case, it is the corporate owners that have a tax disadvantage.
Life of the Business:
There are probably examples of sole proprietorships and partnerships in your community that dissolved when a key person became ill or died – a medical practice, a law firm, a neighborhood store, or a mechanic’s shop. News reports occasionally tell of acrimonious splits among business partners (and even families) who are unable to agree on the management or sale of these forms of business. Real-life examples from Mars, Inc. are provided as an extension activity in this lesson.
Activity 2: Sweet Opportunities
Working with your assigned team, read the client stories in the file, Sweet Opportunities, and prepare at least 2 written recommendations as to which business organization you believe to be best for each client. Make sure your group provides at least 5 reasons for each of your recommendations as well as lists at least 1 negative with suggestions on how to minimize that negative effect.
Use the following links to help you make your recommendations:
"What Type of Business Organization is Best for You?"
Activity 3: Sweet Success
Now your group will research what has happened to the founders and businesses featured in the case studies.
Client 1: Elise MacMillan and her brother Evan co-founded The Chocolate Farm in Englewood, Colorado, in the late 1990s.
Client 2: Milton Hershey broke ground for his chocolate factory near Lancaster, PA in 1903. It was the beginning of what would become Hershey Foods Corporation .
Client 3: Forest Mars invited Bruce Murrie, an investment banker and son of the Hershey company president, to be his partner in M&M Ltd. The M&Ms we still eat today were first sold to the public in 1941. The letters in "M&M" stand for Mars & Murrie. Eventually, Murrie left the business but Forest Mars became the owner of Mars, Inc.
Client 4: Wally Amos launched the Famous Amos Cookie Company in a Hollywood, CA storefront on Sunset Boulevard in 1975.
Now choose just one of the above and share what happened to the entrepreneur and the business. Be sure to include answers to the following questions at a minimum:
- What has happened to the founder of the business?
- Is he or she still involved with the company?
- What other things has he or she done?
- Who owns the business?
- How has the business changed?
- Has the company been involved in any mergers or acquisitions?
- What products does the company sell?
TIP: If a company has incorporated and is publicly traded, another source of information will be Hoover’s Online Directory .
PART 2: Activity 4: 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 5: 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.
Choosing the Best Business to Buy
Should You Buy a Franchise? (Advantages & Disadvantages)
Activity 6: 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.
Activity 7: Something to Think About
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.
Evaluation
Assessment for this lesson will be based on the writings and worksheet from Activities 2, 3, 5 and 6. All activities must be correctly labeled by activity number and hand-written neatly. Tasks will be scored based upon the Assessment Rubric.
Conclusion
Think about what you view as the top three factors to consider when choosing the form a new business. Remember to take into account what you have learned today:
- The resources needed to start and expand the business
- Your level of expertise starting and managing a business
- Your willingness to share decisions and profits
- The level of liability you and any potential partners are willing to accept
- The tax implications of your choices
- Your willingness to re-invest earnings into the business
- How long you see yourself and any partners involved in the venture
- Whether this venture is something you want to live on after you and any partners are gone.