NEW YORK (
) -- If you have a brilliant idea, lots of knowledge and great business sense, by all means go ahead and run that operation independently. For others who haven't created a unique product or service but know they want to be their own boss, a structured organization is likely to be better.
There are options for everyone, including those who consider themselves further to the independent side of the scale.
Understanding the difference between co-operatives, franchising and licensing can help an owner decide which avenue would be the best business for them.
The roughly 4,600 True Value hardware stores operate under a co-operative structure.
McDonald's, Great Clips, Maid Brigade,
Essentially a business-in-a-box, already set up with proven systems and operations that are supposed to ensure success. Lots of support from the franchisor.
Franchisee has little control over the business other than day-to-day management. Buy-ins, especially for more popular names, are expensive. Franchisees must contribute to marketing funds and pay a percentage of royalties to their franchisor.
Level of independence:
In its most basic sense, a franchised business is an agreement for the right to sell specific services and products and market under a parent company's brand, typically within a territory. With that comes very specific business operations and systems from where to buy ingredients (for food franchises) to how the lettering in signs should look to which computer systems are to be used. The requirements come in a comprehensive
Look around a town, city or suburb and it's likely a franchised business is there. The biggest difference between co-ops and franchises is the level of independence and flexibility -- business owners that require more structure and guidance may want to choose a franchise.
"My guess would be the folks at
probably don't want you tinkering with the recipe of a hamburger," says Mark Flowers, vice president of retail growth at the co-operative True Value hardware chain.
Franchises are "best for people that are very comfortable with following rules," says Joel Libava, a franchise-acquisition consultant and author of
Become a Franchise Owner!
Experts typically point to military veterans as ideal candidates to own franchises because they're used to regiments and rule following. Military or not, franchisees "have to really want be willing to commit to the hours needed and the financial risk associated," Libava says.
But for entrepreneurs good at coming up with ideas and who like to make their own rules or look for ways to improve things, franchising is not ideal.
Ocean Spray, Ace Hardware, True Value
Business owner remains independent, but has resources and guidance to help with marketing, legal, compliance and regulation and, most importantly, buying power.
Less structure can be a drawback. There are few customer service and merchandise requirements and no mandate on training, which could be detrimental to a business run by a less-experienced owner. Stores aren't exactly the same and owners have to make adjustments as needed.
Level of independence:
A co-operative is a business enterprise in which independent members come together to form an organization for mutual benefit. Typically owned and operated by members, the co-operative structure is known for offering more than just pure profit.
"Because co-operatives are owned and democratically controlled by their members (individuals or groups and even capital enterprises) the decisions taken by co-operatives balance the need for profitability with the needs of their members and the wider interests of the community," according to the
International Co-operative Alliance's
While the most common forms of cooperatives are seen in agriculture, financial services, housing and production, other industries also boast cooperatives structures, including retail.
, a retailer-owned seller of hardware and related merchandise with roughly 4,600 independently owned stores, operates under a co-operative structure.
True Value consolidates distribution, operation and promotion costs into one company. The biggest benefit for co-operative store owners is the buying power they can generate, Flowers says.
"What we try to do is do things for the independent retailers that they couldn't otherwise do for themselves or, quite frankly, do
for themselves," Flowers says. "Certainly for all retailers the cost of goods is the single biggest cost on our profit-and-loss statement. The power of 4,600 retailers buying together versus that of a single retailer seems fairly obvious."
A co-op structure can also help with store efficiency.
"As an independent retailer, if you run a store in a particular geography -- for example, the Midwest -- they may or may not have as much awareness as to what's working well on the East Coast. We gather information to help all our retailers," he says. "Our vision is to help every True Value be the best hardware store in town. If we do that then we can compete very nicely with the big boxes."
"But at the end of the day you can pick what merchandise you want to focus on," he adds. "We do think there are certain things the customer should expect in every True Value store. They expect to find nuts and bolts, but some of our stores you may find a wonderful selection of fishing
gear in that neighborhood. Some stores add a lot more green goods or live goods depending on the nature of their market."
, Signworld, DJ's Couture, Pilates Vita
Little structure, lower initial investment generally covering inventory, less complex contract, no royalties paid to parent.
Like with a co-operative, signing a licensing agreement may not be the best course of action for a less experienced business owner because of the limited support and resources offered by the parent.
Level of independence:
is permission to sell a product or service but without the rules and strictness of a franchised business.
As a license holder for a product or service, "it's up to you to figure out how to sell," says Drew Wolin of
, a resource for entrepreneurship and franchise opportunities.
Licensing is more frequently about selling products through other stores and Web sites, and a product may be on the shelves alongside similar products, he says.
It's also common to see license-to-franchise transitions as companies grow from start-ups into more established businesses.
"Once they have a proven system, then they can franchise," he says.
-- Written by Laurie Kulikowski in New York.
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Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.