If you’re reading this article, you’re probably considering franchising as a method of expansion for your business. You might be considering franchising as a result of your own research into expansion options for your business, or (as is often the case) you might be considering franchising because you have been approached by others who are interested in buying a franchise of your business.
Franchising has many advantages and can be an ideal business expansion model for the right business. Similarly, there are certain drawbacks to franchising and it may not be the best expansion model for other businesses.
In order to properly consider the advantages and disadvantages of franchising your business, it is important to understand exactly what franchising is.
What is franchising?
Most people are familiar with fast-food franchises and appreciate the reliability of knowing the product provided by a particular fast-food brand will be the same regardless of which location they walk into. This understanding covers two of the elements of a franchise: (1) the right for a business to operate under a particular brand or trademark; and (2) the ability of the party that owns the brand or trademark to control certain elements of the business.
The final element is the payment of a fee from the party receiving the right (the “franchisee”) to the party granting the right (the “franchisor”), in exchange for that right.
Unfortuantely, a full discussion of all the advantages of franchising is beyond the scope of this short article. The advantages listed below are some of the main reasons a business may decide to start offering franchises:
1. Access to expansion capital.
Selling franchises is a good way of obtaining expansion capital without the risk, and loss of control, that may come with other sources of capital – such as bank financing or venture capital. Franchisors can then use the capital generated through the sale of franchises to continue to develop and expand the franchise system.
2. Talented, motivated operators.
The most talented and well-suited people to run businesses may be more inclined to own a business rather than working for one as an employee. Moreover, their investment in the business, and their financial interest in its success, motivates franchisees to work hard to establish and grow a successful business.
3. Lean operations.
Franchising shifts the responsibility of hiring and managing the workforce necessary grow the business to franchisees. Relieved of the associated costs and management difficulties, franchisors can operate with a leaner staff that is focused on implementing and growing the system.
4. Fast growth.
Franchising uses the capital, human and other resources of franchisees to allow a brand to expand and grow more quickly.
5. Local connection.
Franchisees usually have ties to the communities they will operate in. In many instances, the local knowledge and existing connections can be crucial to entering a new market successfully.
6. Reduced risk and responsibilities.
A variety of risks as shifted to or shared with franchisees. These include, compliance with local laws and ordinances, liability for personal injury occurring on business premises and changes to market conditions.
As with most business models, franchising also has disadvantages. Some of the main disadvantages of franchising a business are:
1. Up front costs.
To properly establish a franchise system, franchisors must to invest in the set-up. This typically involves investing appropriate resources into developing: the franchise model, an operations manual, a training program, a compliance/enforcement program, legal documents, advertising materials and a sales and marketing team.
2. Less control.
While franchising is premised on franchisors retaining enough control to ensure replicability across their brand, franchisors ultimately give up a considerable amount of control in comparison to operating company-owned locations.
3. Problematic franchisees.
The rogue franchisee is the successful franchisee who believes that the success of their outlet is based entirely on their own skills and personality, and has nothing to do with the franchisor, the concept or the system. The complainer franchisee is typically an unsuccessful franchisee whose complaints eat up a disproportionate amount of the franchisor’s resources, and who spreads discontent amongst other franchisees. Both can be dangerous and have the potential to require significant resources to manage.
4. Profit sharing.
For a franchise system to be successful, franchisee’s must be able to earn a salary and make a return on their investment. Accordingly, franchisors must be willing to give up some of the revenue they would otherwise retain if locations were opened as company-owned outlets.
5. Internal competition.
Franchisee will compete against one another and may have different goals and priorities. This can make it difficult to get them working together for the betterment of the system as a whole.
As demonstrated by the disadvantages outlined above, franchising is not a fool-proof method of expansion. However, when the disadvantages can be managed in a way that maximizes the advantages, franchising can be a logical and rewarding way to expand. Consultation with experts in the field can help you accomplish just that.
Think franchising might be right for your business?
For more information on whether franchising is the right business expansion model for your business, please see our article titled Should I Franchise My Busines? If you’re ready to take the next steps towards franchising your business, contact one of our experienced franchise lawyers today.