[mage lang=”en|sp|en” source=”flickr”]free sample franchise agreements[/mage]
Business Startup the Easy Way? Franchises, MLM, and Existing Businesses
Potential entrepreneurs who aren’t sure what kind of business to start, but know they want to be on their own are often drawn to the idea of buying a ready-made business. Whether purchasing an existing business or buying into a franchise or multi-level marketing (MLM) program, the idea of having the operations portion of a business already laid out can be very attractive. Before you spend your startup cash on these options, there are a few things to consider about each.
Buying an Existing Business
The advantages of buying an existing business are obvious — cash flows should be immediately positive, receivables and inventory assets are already built-in, you start out with a developed customer base, and the brand should already be established in the industry and market. In addition, the actual operations of the business are likely set and you will usually gain a staff of knowledgeable employees who are able to handle the basics of the business. At least, if the business has been well-run, these advantages should come with the purchase price!
The primary disadvantage of purchasing an existing business is the upfront cost. Though you will save some startup costs in terms of time, cash, and energy over starting a business from scratch, purchasing a good existing business is likely to be expensive. In addition, there is a good chance that the business will have hidden issues that come to light after you close the deal, such as uncollectable receivables, worthless inventory, or well-disguised cash flow problems. It is critical that you thoroughly inspect every aspect of an existing business’s financials, and understand what you are looking for, before you commit to a purchase.
You are also inheriting any and all less obvious problems when you purchase an established business. Image and culture issues are often very difficult to overcome. If the business has a reputation for providing less-than-ideal customer service, simply throwing an “Under New Management†banner up may not entice customers to try the establishment again. Any internal issues with employees may be even more pronounced with the introduction of a new boss, and any changes you intend to make may well be met with severe resistance, especially if the staff members have been with the business for a long time.
Buying Into a Franchise
Franchise opportunities are available in just about every industry imaginable, from food service to mobile auto detailers, from specialty retail to hotels. In fact, over the past three years, the number of different franchise concepts has grown from 300 to over 2,500, including businesses in 75 different industries. A new franchise is opened in the U.S. every 8 minutes, and the average investment is around $250,000.
The advantages to buying a franchise are widely touted — you are buying into a proven business model. The corporation has established an overall business concept that has found success in other locations and usually provides franchise owners with the necessary (and required) supplies at a better discount than an independent dealer could get on their own. In addition, the corporation provides you detailed operations procedures, the name is regionally or nationally known, and some or all of the marketing collateral is provided. Sounds pretty good, but there are some important disadvantages to consider as well.
The initial franchise fees vary widely, from as little as a few thousand dollars for smaller, less profitable business opportunities to tens of thousands for well-known and established brands. This initial cost is not the end of your startup expenses, however, as you are generally responsible for purchasing all equipment, securing the location, and providing all the working capital (for supplies, employees, and other bills) yourself.
In addition, buying into a franchise typically includes committing a portion of your ongoing profits to the franchisor as well. The franchisor reserves the right to evaluate and recalculate your books at will to determine whether you are paying the right amount, an option that some of the bigger franchisors seem to be exploiting. Regardless, a significant portion of your profits are paid to the franchisor, a check that can get harder and harder to send off once you have run the business for a while.
When you commit to a franchise, you are bound to whatever requirements are included in your contract. Typically, these requirements include purchasing only from the approved vendors, even if you can find better prices or terms with others, using the standard operating procedures the franchisor provides, even if you see a better way to do things, and offering any franchise-wide promotions, such as premiums, discounts, or coupons that the franchisor selects. You have very little control over the day-to-day operations of a franchise, down to the uniforms your employees wear. While this can seem like a great advantage now, when you are unfamiliar with the operations of the business you are considering, in time you will know your industry inside and out, whether you go with a franchise or start from scratch. At some point many franchisees feel too bound by the restrictions of the franchise setup.
The brand recognition and marketing assistance that come with a franchise agreement do not always live up to the hype, either. Obviously, some major franchises such as Subway, Hilton Hotels, and Stanley Steemer provide excellent national marketing campaigns through both television and print ads. But of the estimated 15,000 franchises currently available in the US, a very small percentage provide that kind of market reach. More typically, you are provided with an array of marketing collateral that includes print ad layouts and the like that you can use in your own marketing efforts.
Buying into a franchise can be a good choice if you have quite a bit of capital available and are looking for an opportunity that you can turn over to a hired manager for the day-to-day operations. The established processes and procedures reduce the ability of your employees to run amok, changing the operations as they see fit. The right franchise can provide excellent returns on your investment and can be the best choice if you are not looking to remain hands-on with your business.
Buying into MLMs
Multi-level marketing programs are not a new business model, though the monstrous growth of the internet has unleashed a horde of questionable opportunities. Most old-school MLMs, many of which are still available, are founded on the sales of actual physical product, such as Amway, Avon, or Pampered Chef. In these programs, you buy into the program through another representative and are supplied with a sample kit of available products. You host parties or otherwise set up your own customer base and keep a percentage of the sales. In most MLMs, the representatives above you in the levels are entitled to some lesser portion of your sales, all the way up to the actual owners of the MLM. Some programs limit the income for those above you to the initial buy-in, but either way, the one making the most money is the person at the top.
The advantages of MLM programs are the ease and lower cost of starting your own business, the flexibility of the work hours, and the marketing tools usually included with your buy-in. The more recent MLMs often provide an online “informational†product of questionable value, and those who buy in are expected to sell more of the MLM businesses, not the product itself. The product is there merely to make the business concept legal by offering a “legitimate†product. These get-rich-quick concepts usually include “your own website†already designed for which you pay a monthly maintenance fee. The idea is that you need only sell one or two of the business concept you bought to turn a profit. Often, these programs also provide marketing collateral in addition to the website, for a fee, such as colorful postcard-sized advertisements or lists of places to purchase classified ads.
The reality of either type of MLM program, legitimate or otherwise, is that the disadvantages and limited likelihood of success far outweigh the advantages. In both cases, your business’s growth and income potential are pretty limited. Most of the legitimate product-based companies now sell direct to consumers online at the corporate level. In some instances, a representative from the purchaser’s area gets a smaller percentage of those sales, but usually the representatives only earn on the products they sell themselves. Therefore, the online stores cut directly in to the independent reps market.
The popularity of ecommerce has also reduced the MLM market in general because people can simply search the internet to find what they are looking for rather than waiting for a representative to stop by or host an event. Of course, if what you are looking for is a simple, few hours per week method to earn extra cash, and one of the established MLM programs includes products you are interested in selling, this can be an excellent small business option. Just be sure to do your homework before committing your seed money!
The more recent and more questionable MLM opportunities often walk a thin line between legal and not — the US Federal Trade Commission oversees these programs and frequently passes judgment on whether new programs are legitimate or not. The factors that make a business opportunity illegal are charging large upfront fees, requiring large inventory purchases or high minimum orders, and directly paying “business owners†just for recruiting new members. For this reason, many of the internet-based MLM programs available offer those “information service†products that are not intended to be sold as actual products, but must be included to make the program pass the federal laugh test.
The reality of MLM programs is that most people who buy in never earn their investment back. The pitch always makes it sound easy to draw customers, as though simply posting a web page will provide endless sales leads. Actually, posting a web page without marketing it is like writing your ad copy on the back of your hand, then wearing a glove. If nobody sees it, it might as well not exist. Remember, too, that those “free websites†are provided to all the other purchasers hoping to get rich quick — exactly the same webpage is provided to everyone, with limited options for customizing it (such as adding your photo and contact info). If you are looking at these opportunities, search for the key words of the program you are considering, and check the first few hundred results. If the name is distinguishable, you will probably find dozens of sites selling that same program.
The best place to be in an MLM program is at the top. If you have a good idea for a product that could be distributed and marketed through an MLM, consider putting in the time and effort to start your own. If you choose to buy in to an existing MLM program, be prepared to sharpen your marketing skills across the board. Succeeding in an MLM is all about the marketing and networking, both of which require significant commitment on your part.
Conclusion
For those entrepreneurs who are thinking that purchasing an existing business or buying in to a franchise or MLM is the best route to independence, be sure you consider all your options before you commit. If you are looking at a particular industry or type of business, do your homework to determine whether starting the same type of business from scratch is feasible and whether you would be better off long-term doing it yourself. Also, ask a lot of questions about what you get for your money — if they tell you it comes with “marketing†find out exactly what that means. Talk to others who have bought into the same program and search the web for forums and blogs related to the opportunity you are considering.
One common aspect of each of these options — starting your own business or buying into a ready-made concept — is that you, as the business owner, must still figure out and manage the business side of the equation yourself. That is, none of these options includes planning, financial management, or significant marketing training. These three areas are the keys to success for any and all businesses. It is up to you to learn and apply all you can about the business side of your venture, whether you develop the operations side on your own or pay someone else to provide it for you.
About the Author
K. MacKillop, a serial entrepreneur with a J.D. from Duke University, is co-founder of LaunchX LLC. The LaunchX System, a five Unit series of step-by-step startup procedures, key business software, and marketing reference books, is designed to assist entrepreneurs in developing a business idea into a successful company. Take the free Business Readiness Assessment and get on the road to business startup today.