There are many differences between family-owned businesses and franchise businesses. Family businesses are often businesses that are owned and operated by a single or group of families, or by a few individuals from the same family group (Sullivan). Family businesses are most often opened in hopes of filling a certain niche within a market, and are controlled exclusively by the individuals within the family, or individuals that the family allow to participate in the business. Jus
t because a business is family-owned does not mean that the business cannot be publically-traded or very large; however, when referring to the concept of a “family business,” most economists are referring to smaller-sized businesses that are controlled by a specific family unit (Sullivan).
There are significant exceptions to the generalization that family-owned businesses are commonly small businesses. In the United States, perhaps the most notable family-owned business is Walmart (Sullivan). Walmart is one of the largest corporations in the United States, commanding huge amounts of capital; however, the entire corporation was founded by a single family and continues to be managed by members of the same family (Sullivan). In a family-owned business, the management team is often made up of at least two different members of a family unit; however, a family may show high levels of nepotism throughout the different levels of the business (Acg.org).
Individuals within the family unit who do not show potential for management positions may still find themselves involved in the business (Acg.org). In addition, children and other young people who do not have the skill set necessary to run the business may find themselves working the floor of the business or participating in other types of labor in preparation for a later job at the business (Sullivan).
There are many benefits to having a family-owned business. One of the main benefits of a family-owned business is the ability for the family to control all levels of operations (Sullivan). If the business is a successful one, then the business will be able to provide a comfortable lifestyle to many different individuals within the family unit (Sullivan). Successful family businesses can be used to build entire family names into recognizable brands; for instance, the Carnegies and the Morgans of the world began with nearly nothing, using their skills and business prowess to build their names into recognizable brands (Acg.org).
However, there are also problems with building family businesses: one of the major problems with building a family business is the problem of family itself. Families are notorious for having interpersonal problems, and family businesses are no exceptions to this rule; figuring out how to work effectively with family members can be a very difficult and daunting task for many families (Acg.org). Other issues may arise when the issue of succession becomes important, and the owner or founder of a company must choose which family member to pass the company and the profits on to (Acg.org).
Franchising, on the other hand, is different from a family-owned business, but the two types of business models are not necessarily exclusive. A franchise is an iteration of a chain business that is owned by an investor (Wdfi.org). In business terms, franchising refers to utilizing another business’ successful business model; this type of business can be seen often with chain restaurants (Wdfi.org). One of the most commonly-franchised business is the sandwich shop Subway; however, many fast-food restaurants are franchises (Wdfi.org). An investor pays to use the name and the business model for these shops, and in turn, receives help from the corporate offices of each respective business.
A franchise is not a family-owned business, but a family could own and operate a franchise business. The investor pays the start-up costs for the business, and then the corporate offices of the business allows the investor to use the trademark of the business to turn a profit in the long run (Wdfi.org). The reason why this type of business is different from a family-owned business is because the investor does not truly own the business; they are merely borrowing the corporate logo and business model as a way to mutually profit from the business that is created in any given location (Wdfi.org).
Franchising can be an excellent way to set up a risk-free business for individuals or families who have some capital but are unwilling or unable to take the large financial risk that comes with opening a new business. New businesses often flounder in the first few years that they are open, and many do not turn a profit for many years (PricewaterhouseCoopers LLP). A good way to alleviate this potential loss is for people who are unable or unwilling to shoulder the potential financial burden of opening a new business that has no potential safety net.
Choosing whether to begin a family-owned business or to open a franchise depends entirely upon the goals of the individuals or the family that is opening the business. If the family has recognized a need in the market or a specific niche that must be filled by a business, then perhaps a franchise is not the ideal option for that particular instance; however, if capital or know-how is limited, franchising is an excellent option in the long run.
Acg.org. "Deal Making for the Family Owned Business." 2013. Web. 3 Jul 2013. <http://www.acg.org/sandiego/events/familyownedbusiness.aspx>.
PricewaterhouseCoopers LLP. The Economic Impact of Franchised Businesses. New York: National Economic Consulting, 2005. Print.
Sullivan, Paul. "Modern Safeguards for a Family-Owned Business." The New York Times, February 15. 2013: Print.
Wdfi.org. "Franchising." 2013. Web. 3 Jul 2013. <http://www.wdfi.org/fi/securities/franchise/history.htm>.