Exploring Business Ownership – Franchises, a Controlled Way to Own a Business (Part 5 of 7)

In part 4 we began a discussion on how to assess your risk tolerance for business ownership by analyzing the way you think. I covered the 3 main ways to earn income, outlined the risks associated with employment, and how employees typically think. If you didn’t identify with “employee think” then maybe you’ll identify with franchise ownership.

Franchise Ownership

Franchise owner think is:

I can run the systems, methods, and procedures that are already defined and documented. If you’ll show me how, I can pull the right levers and push the right buttons to make the business work.

If you’ve had middle management experience or if you’re a “systems” kind of person, if you like a broader scope of responsibility while staying within certain rules, if you can solve big picture problems but enjoy support when you’re having a tough go of it, if you want more personal freedom than being trapped 9 to 5 in an office cube, and if you want to build equity in a business investment that you can eventually sell, then owning a franchised business model is worth looking into.

Most people think of restaurants when they think of the franchise industry. However, there are literally thousands of franchised business models available in the US in at least 50 different industries, although in my opinion probably only a few hundred are truly robust or mature enough to consider investing in.

When you buy into a franchised business model you license the right to operate a business, usually within a prescribed territory, using the franchise brand name and their products, services, and methods of operation. You basically operate a “clone” of what other franchisees are operating.

Presumably the products and services have been tested and perfected, target markets have already been defined, marketing campaigns have been developed, store designs have been created, and the necessary equipment has been specified. You essentially operate the business model in accordance with the methods and procedures prescribed by the franchisor. Some feel that it’s a controlled way of getting your feet wet in the business ownership world.

Risk Assessment

In my opinion investing in and operating a franchise is more risky than employment, but has less risk than an unsupported entrepreneur-owned business. The franchisor has a vested interest in helping you succeed in their business model because they get a royalty cut of your sales income stream.

However, it is certainly possible to fail in business owning a franchised business model. If you don’t follow their system, if you refuse to market your business, if their business model, product, or service simply doesn’t meet the needs of the market place, or for any of a number of other reasons, then you can loose your entire investment (just like entrepreneurial business ownership).

If your risk temperament seems to be right for the franchise area, then I highly recommend retaining an independent outside advisor to guide you through your initial investigation and evaluation of the thousands of concepts available. Like independent fee-for-service financial advisors, getting professional counsel to help you navigate through this area will be money well spent.

Did you identify with “franchise owner think?” If not, stay tuned. In part 6 we’ll explore how entrepreneurial business owners think.

Types of Business Ownership Structures

A business ownership should be structured according to the needs of the owners and potentially liability that the business could incur. The different types of business ownership are

Sole proprietorship

Partnership

Limited Liability Corporation

Corporation (for profit)

Nonprofit corporation

Limited Partnerships

This type of business organization is costly and complicated to prepare. It is not recommended for the average small business owner. Limited partnerships are usually created by one person or company who solicits investments from others. The people who invest are considered the limited partners. The general partner is in charge of the business’s everyday operations. They are personally liable for business dents. Limited partners have little control over daily business decisions or operations. Because of this they are not personally liable for business debts or claims.

A Corporation

The most significant benefit to forming a corporation is that it limits the owners’ personal liability for business dents and any court judgments against the business. A corporation is an independent legal and tax entity. This sets it apart from other types of businesses. The owners do not use their personal tax returns to pay tax on corporate profits because the corporation itself pays these taxes. Any money drawn from the corporation in the form of salaries, bonuses, etc is paid by the owners in their personal income tax returns.

Limited Liability Corporations

Limited Liability Corporations provide their owners just that, limited personal liability for business debts and claims. However, LLCs resemble partnerships when it comes to taxes. The owners of an LLC pay taxes on their shares of the business income on their personal tax returns. This type of organization is good for business owners who either

Could be sued by customers

Run the risk of piling up a lot of debt

Have substantial personal assets they want to protect

Sole Proprietorship and Partnership

A sole proprietorship, or partnership, is the ideal ownership structure for an up and coming business or the average small business. They do not have to be registered with the state and go into effect as soon as one person goes into business with themselves or two or more people go into business together. Any business income is reported on the owner’s personal income taxes. They are also personally liable for any business debts or court decisions against the business.

For more information on business ownership structures, visit www.businessdirectoryforyou.com

Exploring Business Ownership – Putting it All Together (part 7 of 7)

We’ve explored the options for earning income in this 7 part series, ranging from the world of employment to full entrepreneurial business ownership. We’ve covered some basic concepts of what it means to be in business, the personality types that do well in this arena, and how to gauge your tolerance for the risks involved.

If, after absorbing all this knowledge, you decide you’re still interested in business ownership, then you’ll want to know how you can stack the odds of being successful in your favor, and when in life or an economic cycle is the best time to start or buy one.

When Is the Best Time to Start or Buy a Business?

Frankly speaking, there’s never a best time in life to get into business. In fact, there’s almost never a “good” time to get into business at all, because there’s always a good reason not to.

Reasons not to include, “We just got married and we’re saving for a house.” “We’re expecting our first child and we’re saving for that event.” “We’ve just started a college savings account for the kids.” “We’re pregnant (again).” “We just bought a bigger house and it’s put a big strain on our budget.” “The economy is up, so my job is secure.” “The economy is down and we have to watch our expenses ‘just in case’.” “I just got laid off, so we’re really watching our budget.” “I just got hired, so we have to rebuild our savings.” “We have kids in college and tuition is due.” “Our parents are in failing health and we’re contributing to their financial upkeep.” “Retirement is just around the corner and we’re making maximum contributions to our.401(k).” And finally, “We’re retired.”

So, there’s never a best time in life to get into business for yourself. If you’ve decided that your risk temperament is right for some type of business ownership and you have the motivation to take the plunge, then at some point you just have to take the bull by the horns and do it.

Why Businesses Succeed

Remember that you must have the basic ingredients in place to be a successful owner, regardless of your degree of risk tolerance or the business model you operate; self-motivation, the willingness to ask for help, a clear understanding of what you want to achieve, and the emotional ability to change when the business or market needs require it.

Of all the attributes I’ve listed, the willingness to ask for help, insight, advice, and counsel at every opportunity is the single most important thing you can do. Don’t try to go it alone; there’s simply too much at stake.

Successful business owners have a drive to succeed, know that they don’t have to singlehandedly blaze their own trail, recognize what’s at stake if their business fails, and realize that every great team and performer has a skilled coach helping them.

Eric Schmidt shared in the July 6, 2009, issue of Fortune Magazine that the best piece of advice he ever received was to hire a coach. And frankly, if the chairman and CEO of Google needs a coach, then you need one, too.

Why? Good business coaches give a 3rd party look at an issue and how you’re handling it, they discuss alternative approaches or options with you that may be more effective, and they encourage you to change habits or take risks that you wouldn’t be prepared to do on your own. They are a sounding board; they become a trustworthy confidant who has your best interest at heart. Finally, a good business coach will help you break through to achieve what you couldn’t on your own.

Then, successful business owners will grab the bull by the horns and implement the advice they’ve received. And if execution is not their strong suit, they’ll ask for help in learning how.

Wrapping Up

Business ownership is a high risk venture that can have great rewards. I hope what I’ve shared here has given you some personal and professional insight as you explore the world of business ownership. I’d enjoy your feedback on whether this series has helped you in your decision making process. If you decide to go forward, I’ll look forward to hearing how you’re doing. I wish you the very best of success.