Franchising is a business model that expands a company into new markets while maintaining the brand integrity and internal systems. In exchange for fees and their own investment, franchisees gain access to exclusive trademarks, training support and business practices. It can be a great opportunity for expansion but is it right for you in particular? Below explains the advantages and disadvantages of franchising your business.
To Franchise or Not to Franchise
Entrepreneurs must analyze their business model and company profile in order to know if they should expand through franchising. Companies that successfully franchise tend to share common characteristics. First, they have a proven track record that includes consistent revenues and customers. Second, their market appeal is broad, so the potential demand for their products or services will easily transition to alternative communities. Third, the company’s brand message is reliable and well-recognized. Fourth, the business model is organized, systematized, and imitate-able. Companies that demonstrate these traits are pre-qualified to become successful franchisors and will usually do well in this endeavor.
Franchising provides easy access to expansion capital because franchisees pay to join and stay in the business chain. This means that business owners can expand their number of locations without using their capital or requesting it from banks or investors. The new franchisees will use their money to grow the business owner’s company. This means they will usually be buying vehicles, furniture, inventory, equipment, and supplies. For example carpet cleaning companies that franchise out like Zerorez might provide the marketing strategies, support, and brand reputation for a new franchise, but may not provide some physical supplies. Lease arrangements and facility operating expenses are the franchisee’s responsibility. On the other hand, a franchise that has a least a few locations will offer amplified marketing and advertising power. This in turn will allow the franchisors to continue to expand into new communities.
Small to medium sized business owners know that human resource management is an ongoing challenge because finding and keeping quality employees and management is a difficult and time consuming process. However, franchisees are typically responsible for screening, hiring, training, and retaining new employees. Franchisees tend to be high performing go-getters who want to run a business instead of working a regular desk job. This means that franchisees will most likely be highly qualified, hardworking people who want to achieve success. In the long run, franchisors will acquire access to the best talent because these individuals will be motivated and dedicated to business success.
Managed Risk and Growth
Franchising usually generates strong financial returns with minimized risks. When adding a franchise, the franchisor accepts little risk and invests little money into the transaction. This is opposite to what happens when adding a branch of a company-owned outlet. Franchisors with excellent business models will earn steady royalties from sales at new locations. Related to this, franchises tend to enjoy the ability to grow more rapidly. Even if only one new franchise opens up every few years, this is still faster growth than most mid-sized businesses. Consistently opening up new locations will provide valuable business and marketing data that can be used to minimize financial and operational risks.
Lack of Control
There are a few caveats when it comes to the franchising business model. For example, franchisors have less control over managers, who are empowered to supervise employees and independently make business decisions as they wish.
Franchisees are independent businesses, so they may have contrasting goals that may cause conflict or lead to legal troubles. To illustrate, a franchisor may focus on commercial customers, but a new franchisee may be more interested in residential clients. To avoid this problem, franchisors must clearly define the brand identity and target marketing content in the franchise agreement.
As a final note, franchising in remote locations may create a weaker internal community that lacks collaboration. To minimize this problem, engage in strategic long-term planning that includes established geographic boundaries. In the end, the advantages of franchising clearly outweigh the disadvantages, so it’s a safe and proven way to expand businesses.