Going into Business: Is a Franchise Right for You?
Many people still look to jobs as employees to gain whatever financial security they can create for themselves. Others choose to start their own businesses from scratch - offering goods or services that hold interest for them and for which they believe they can find local or broader markets. Many of these individuals operate in highly fragmented industries weighted for local focus. Auto repair shops, local boutiques, local dry cleaners and similar types of businesses fall into this category.
Others want the freedom of having their own businesses but prefer not to be totally on their own to grow those businesses. For those people, franchises have been attractive in the past. Others choose home-based multilevel marketing (MLM) businesses. Both routes offer similar benefits. Individuals have the benefit of corporate management expertise. Each offers good or service uniformity across local markets. This means that a burger at McDonalds on the East coast is virtually identical to the same menu item at a McDonalds on the West coast and everywhere in between. Though some complain about the absence of variation, anyone walking into a McDonalds anywhere in the country - and even in most parts of the world - can order a specific item with the assurance that what they will receive is something that meets their expectations.
Why Network Marketing is often a better option than buying a Franchise
Though there are benefits in franchising, most of those benefits are reserved for the franchisers, those who extend franchise rights to individuals willing to accept the franchisers' terms. There are certain facts of life associated with any business structure. When compared to each other, Network Marketing wins over franchising in every case. Following are some of the most glaring differences.
Every business costs something to start. There is a broad range of franchise fees across industries, but the basic franchise fee is only the first of a long list of costs that the franchisee encounters. There is a franchised maid service that can be had for a franchise fee of $5,000 plus all other startup costs such as equipment, vehicles, supplies, office equipment and similar items. At the other end of the spectrum, a fast food franchise can cost more than $1 million in franchise fees plus requirements for personal or business net worth. As example, a new Burger King franchised restaurant costs an average of $2.2 million for those who can demonstrate $1.5 million in net worth and at least $500,000 in liquid assets.
A costly Network Marketing, on the other hand, can cost as much as $5,000 to start. Network Marketings with such high buy-in prices are rare, however. Individuals can begin real home businesses with investments as little as $100. A downside of the relatively low startup cost is that most people don't consider Network Marketing to be a "real" business. Those who treat it as such and stay for the long term generally are eager to say that it is very "real", indeed.
That high priced franchised restaurant, cleaning service or gym cannot survive without employees. Someone has to take orders, flip the burgers, clean the toilets and encourage workouts. Most employees of franchised business earn at or near minimum wage, but the cost to the employer is far greater than what the employee receives. Employers have to pay several types of payroll taxes, and there is increasing pressure on all employers to offer some form of health insurance. Employers also have to ensure that they have adequate numbers of people to work their businesses. Turnover is high among low-paying jobs and is highest within the fast food industry. There, turnover often averages well more than 300 percent. That means that management - i.e., the franchise owner - is devoting much time to advertising, interviewing and training employees that most likely will not stay long with the company.
Network Marketing business owners have no employees unless they choose to have one or two housekeepers or business assistants. Most Network Marketing business owners have no employees at all. All of the time that franchise owners spend in recruiting, selecting and training the Network Marketing business owner can spend producing financial results. The MLM business owner never faces a day when a key employee simply fails to show and never shows up again. S/he never has to deal with unprofessional employee conduct. S/he never hears any customer complaints about employees. S/he never, ever, faces a wrongful termination lawsuit for dismissing an employee who refuses to work.
The franchise fee is only the initial cost of a franchise. The business then has to share a percentage of revenues - not profits, but revenues - with the franchiser. The franchiser promises to use a portion of that money for advertising that will benefit all franchise holders. A franchisee can depend on reliable and consistent advertising that promotes all franchisees without favoring any specific one or group. The bottom line for the franchisee is that s/he does not have to deal with costly advertising campaigns. The negative feature is that franchisees can participate in small, local advertising activity - such as advertising in a high school yearbook - but has no control over any advertising route that corporate decides to take.
Most Network Marketing companies prohibit their independent representatives from advertising in any way that includes a company name or company logo. This is a wise prohibition because the company has no means of controlling what individuals might say. As example, no nutritional supplement company can afford for any independent representative to make false medical claims. Network Marketing business owners can advertise themselves and their services but generally cannot use a company name. This protects the parent company and all other independent representatives but it also saves the individual representative all of that advertising money.
Franchise companies can claim all of the tax breaks available to companies, of course. They can deduct all of their costs of business - physical overhead, cost of goods sold, payroll taxes, depreciation of location and equipment and other deductions - but then they pay 34 percent on their net profits. The bottom line for many franchised businesses is that they only break even.
A home-based Network Marketing business owner has many other benefits available. The costs of a dedicated home office are deductible, but taking that deduction often sends up a red flag at the IRS. All other deductible costs are routine, however. An Network Marketing business owner can drive to meet a client, stop by the grocery store on the way home, pick up the kids from their after-school activities and legitimately deduct 53 cents per mile traveled. Former IRS agent-turned-entrepreneur Sandy Bodkin teaches that anyone without a home-based business essentially tosses $1 out the window for every two miles driven for routine errands. Drive 20,000 miles a year? A home business allows the owner to take more than $10,000 off of all income before figuring taxes on that income.
Where consumable products are concerned, product liability risk can vary widely between franchise and Network Marketing businesses. Remember the hot coffee lawsuit against McDonalds in 1998? It's the reason that all McDonalds' cups now carry a warning that contents “may” be hot. The court awarded the plaintiff $2.86 million and the corporation took on the case rather than leaving it with the franchisee. This was because the franchisee operated according to corporate instruction to keep the coffee at temperatures in excess of 200 degrees. Had the franchisee been acting outside of corporate dictates, it would have been the franchisee that was responsible for the financial award.
Network Marketing products and services nearly always are of highest quality. They are the targets of many fewer product liability lawsuits. Legitimate and ethical Network Marketing companies deal with all product liability cases that may arise. An Network Marketing representative is an independent representative and so virtually never is subject to any such lawsuit in our litigious society.
Virtually no one accuses McDonalds of having high quality products. Local franchise owners with Merry Maids keep their customers only by cleaning their houses well. Subway restaurants generally are successful but most view them as being only a single step above other fast food choices.
On the other hand, most MLM companies offer only highest quality goods and services. One reason is that they are being promoted and sold mostly by inexperienced salespeople and truly need to be able to sell themselves. Another reason is that the multilevel pay structure requires a higher per-unit profit and only high quality products can command that higher profit. Probably the most accurate point is that individuals will not recommend goods and services to their friends if they are not of high quality, and Network Marketing thrives on the holy grail of marketing, which is word of mouth advertising.
Network Marketing beats franchising in virtually all respects. The only downside when comparing the two is that Network Marketing is much easier to exit. Its entry cost is low, so quitting always is an option. That's not the case with a $25,000 or $2.2 million franchise. Those owners just have to tough it out.