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Collective business system

A collective business system is a business organization or association typically comprised of relatively large numbers of businesses, tradespersons or professionals in the same or related fields of endeavor, which pools resources, shares information or provides other benefits for their members. In the past, collective business systems such as the trade association, the cooperative and the franchise were created to allow groups of independently owned businesses with common interests to successfully compete in the marketplace.

Beginning in the latter part of the twentieth century, the business world has witnessed the consolidation of all types of businesses through mergers, rollups or acquisitions. Typically, by the end of the consolidation process, a particular industry or profession becomes dominated by three or four nationally-based enterprises. Under these circumstances, the small, local, independent company is often forced to sell to one of the dominant entities because it can no longer compete profitably with large consolidated organizations. Typically, locally based businesses are unable to compete because they lack the capital, global marketing capabilities, purchasing power and expensive technology necessary to operate efficiently. This trend toward consolidation is expected to continue well into the twenty-first century.

Presently, and for the foreseeable future, the inherent limitations of traditional collective business systems such as the trade organization, the cooperative and the franchise render them considerably less effective than they once were in advancing the business interests of their constituents. The following is a brief synopsis of those traditional collective business systems.

1. Trade Association

Trade associations are non-profit organizations in which the individual members are companies or individuals engaged in a common business pursuit. Competitors join together to create a platform format in which they deal with common problems of their industry. Any applicant meeting the standards of the association must be accepted as a member. Anti-trust law prohibits a member trade association from denying an otherwise qualified applicant's membership based upon a geographical proximity to an existing member. Trade associations commonly offer their members educational programs, the opportunity to come together at meetings to discuss common problems, and marketing materials designed to be imprinted by each member with its relevant information. Trade associations also offer elective group purchasing plans. The trade association bears no credit risk in these transactions but instead, provides chosen vendors with access to a large body of member customers. Because the trade association does not pledge its credit, the vendor must rely upon the credit worthiness of each purchaser.

To sustain its operations, a trade association generally receives an initiation fee and/or a yearly membership fee (collectively "dues") from its members, and it may collect rebates or commissions from the purchasing plan suppliers.

2. Cooperative

A cooperative is a non-profit organization somewhat similar to a trade association. A significant difference between the cooperative and the trade association, however, is that with a trade association, the members have a non-equity position in the association, whereas in the typical cooperative the members will have an equity interest as all members of the cooperative own a portion of the cooperative. Generally, a cooperative only addresses one facet of business operation needs of interest to its members, e.g., purchasing of goods and services at advantageous prices. A purchasing cooperative is at risk in that it holds considerable assets in the form of inventory and provides credit to the businesses in the cooperative. In addition, the members of the cooperative risk loss of invested capital if the cooperative proves unsuccessful.

The cooperative utilizes its volume leverage with suppliers in purchasing products and services for less than the individual member company could obtain outside of the cooperative. The cooperative marks up the purchased products or services in order to cover operating expenses. Any net income achieved by the cooperative is then returned to the cooperative members in the form of a redistribution of profits or dividends. Like a trade association, cooperatives cannot exclude members on the basis of geography or create exclusive territories.

There are also cooperatives in which the sole function is for marketing and advertising in a given region. New car dealers and fast food franchisees typically form marketing and advertising cooperatives.

3. Franchise

The franchise is a for-profit collective business system wherein the franchiser offers proprietary products or services to its franchisees. The franchiser generally gives considerable marketing support to its franchisees. In exchange, the franchisees are subject to a substantial amount of control by the franchiser concerning its operations and marketing including the use of the franhisor's trade names, trademarks and copyrighted materials. A franchisee's employees typically are required to wear uniforms and to dress as specified by the franchisor. Franchises can be offered by the franchisor on a teritorial basis without violating antitrust laws. Ordinarily, the franchisee owns the non-real estate assets of a franchise. There is generally a substantial fee paid by the franchisee for the privilege of becoming a franchisee. This is followed by a period of training that is offered on an ongoing basis throughout the franchise. Most states have laws highly protective of franchisees in prohibiting the franchisor from terminating the franchise so long as the franchisee meets predetermined business requirements and does not otherwise violate the terms of the franchise agreement.

The franchisor derives income from the initial franchise fees and products and services, which are offered to the franchisees on either a mandatory or optional purchase basis. The franchisor generally derives additional income based upon a percentage of the volume of business conducted by the franchisee. The franchise agreement also usually provides that the franchisee can only sell products supplied or approved by the franchisor.

Among the traditional collective business systems only the franchise can create exclusive trade territories. Conversely, however, the franchise structure severely inhibits the independence of the franchisee and the success of the franchisee is inextricably tied to the success of the franchisor. The franchisee is not free to introduce non-approved products or services and is generally precluded from introducing innovative business or marketing strategies by the extensive control imposed by the franchisor.

The trade organization imposes relatively low membership dues on its members. However, because initiation fees and annual membership fees are nominal, the trade organization lacks the ability to engage in offering its members national marketing capability, access to expensive technologies and cost-effective purchasing programs for major purchases due to a lack of capital. Furthermore, being non-profit, trade associations do not have the management mentality necessary to sustain major projects such as national sales and marketing. Today, they are of little help in enabling their small, independent members to compete with large national competitors.

Cooperatives, like trade associations, are hampered because they cannot carve out or assign geographic territories to their individual members and are limited to executing a single business function, e.g., purchasing of products and services or marketing.

An advantage exists, therefore, for a collective business system, which can enable independent business entities in a common field of endeavor to compete effectively with large nationally and internationally based competitors. The collective business system should be structured to include a substantially liquid asset based, for-profit business entity which can assign geographic territories of operation to its participants, as well as provide its participants with purchasing power leverage, discount capital financing, global marketing capabilities, access to high cost technology and a broad range of goods and services. The system should not impose burdensome dues or other fees on its members. And, for participants who are also shareholders in the for-profit business entity, the system offers additional financial rewards in terms of equity growth and dividend distributions.