At first glance, a Mcdonald’s and a local burger shop may appear similar in their menus; there are significant differences in how these two restaurants operate. A franchise like McDonald’s or Wendy’s consists of a franchisee contracting a deal with the franchisor, like McDonald’s. The major difference between a franchise and a small business is that small businesses operate entirely independently from any contractor or franchisor.
Startups generally have three ways to organize; a franchise, an independent small business, or a corporation. Any person that wants their own business or an independent business will immediately take notice of the first two business models.
While franchising can have major advantages for a prospective business owner, the loss in operational control and business autonomy does not compare to owning a small business. The franchise business is a relatively familiar concept. It can be of great use to business owners who want to start a new business or become their own boss, but a small business is an entirely different business plan.
While franchises may be great for someone who wants to expand an existing business or needs ongoing support, someone who wants full control over their startup business would prefer the small business model.
What makes a small business less attractive to prospective business owners is the risk and liability involved in running that business. A small business owner has to put up all of the costs, eat all losses before a profit is made, and is liable to financial institutions like banks, which they may borrow from. Besides this significant risk, small business owners also enjoy the full benefits of their labor, meaning they control what happens with the entirety of profits.
What is the Definition of a Franchise?
A franchise can look similar to a small business, but there are significant differences. A franchise is accountable to the licensing deal or franchise agreement, which can come with expenses like royalties and franchise fees. This deal can last anywhere from 5-10 years and can be resigned upon terminating the contract, and franchisors typically look for a franchisee with experience and a good track record.
Franchise owners must have brand awareness. The franchise agreement can determine how a franchise uses its brand, what kind of equipment is used, and even how the brand appears. The relationship between the franchisee and franchisor is also of utmost importance in a franchise model. This means that paying dues and ongoing fees to the franchisor and listening to their advice can define how the franchise model is run.
Franchisors will often provide franchisees with equipment, comprehensive training programs, and a support group to assist the franchisee in creating their business. Many of these amenities are not extended to small business owners.
What is the Definition of Small Business?
A small business is a business that is owned and operated by one individual or the owner. This model leaves all the liability involved to the business owner, meaning that the business owner takes on a sizable risk when starting their venture.
Small business owners need more entrepreneurship skills compared to an existing franchise. Owners with more business experience and buying power will usually have higher success rates than first-time owners. They also have to create their own brand name and their own customer base. While there are many strategies to increase customer traffic and brand recognition, these are two more factors a small business must consider on its own.
Because of the risk and liability associated with being a small business owner, this type is not as common as franchises in the United States. This is because a franchise model sets up franchisees for success by taking the responsibility of training and hiring upon themselves and providing equipment and other assets to franchise owners directly.
What is the Role of a Franchisee?
The role of the franchise system is to make profits for the franchisor and franchisee. This relationship works by equipping the franchisee with the right tools and training to operate a profitable business. This allows the franchisee to create a profitable business, allowing the franchisor to collect a cut of those profits through avenues like royalties or fees.
United States regulation and aspects of the franchise agreements require that a certain level of risk is transferred from the franchisee to the franchisor, meaning that franchisees are intended to be a stable and profitable business arrangement for all parties involved. Franchise opportunities exist to provide an avenue for prospective business owners to create a profitable business with ease. This is a proven business model.
What is the Role of a Small Business Owner?
The role of the independent business owner or small business owner is to create a profit for the business owner and sustain that business. While hard work, a good cash flow, and extra due diligence on behalf of the owner are necessary, this does not guarantee a successful business.
Not only is risk and liability on the small business owner, but the small business owner must decide training, hiring, equipment, and assets. Running a small business can be a lot of responsibility. It is not uncommon for business owners to delegate some of their operations to managers or staffers to mitigate some of that responsibility; however, delegating powers to others does not minimize the risk of small business owner initially takes.
If profitability is what you’re after, then maybe you should sit down and create a solid marketing plan to create your own startup franchise or small business. While negotiating with lenders and acquiring real estate can be tedious, you too can be your own boss as a small business or franchise owner with some hard work.
Being your own boss can be a lot of extra work, but it can also be rewarding. Seeing your work benefit your community while you make a great income is two of the many reasons people choose to operate their own businesses. While success is not promised in either of these models, there are many business opportunities to make one of these business plans work for you.