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Expansion Models

Written by: John Power

Article Overview: When you begin to think about expanding your business, several expansion models can be considered. Here is a brief summary of the most often-used expansion models.

Expansion Models

Internal Growth

This is perhaps the “traditional,” or one of the most commonly used methods of expansion in the past. The advantages are that you maintain control and potentially can receive more profit than with some of the other methods. However, the disadvantages include: (1) capital requirements usually mean that you will need some form of external funding such as investment or debt, as it is difficult to finance growth from retained earnings, (2) you probably will have to sign leases in the new areas where you do business, and (3), this method of expansion eventually involves hiring a large number of employees with the costs of payroll, benefits, and related employee liabilities.

Partnerships

A partnership requires giving up of some control, profits, and management decision-making. You will have to share profits with your partner and may risk having to negotiate every major decision with the partner. Partners may want to be more involved in the business than you would prefer. It is easy to form a legal partnership, but a downside is that you may be financially liable for any decision the other partner makes, even without your knowledge. If you operate remote locations with the partnership model you may have lease and employee exposure as well. Partnerships can also be difficult to end.

Business Opportunities/Distributorships

Selling business opportunities was common a decade or two ago, and is still done, but this isn’t really an expansion model, as it is more of a one-time sale. One of the problems with selling business opportunities is that they fall under the same FTC rule as franchises, even though this is frequently overlooked, and are more restricted than most people realize. The FTC does take action against people who sell business opportunities without meeting the necessary legal requirements, and the penalties can be heavy. Some states also have specific laws regulating or restricting business opportunity sales.

The amount that can realistically be received from the purchaser of a business opportunity is limited, perhaps to less than $10,000, and there are no ongoing royalties. People who spend more than this want to have an ongoing relationship with the company that sold them the opportunity, do not want to be “left on their own,” and want to believe that they have reasonable chance for success.

People who want to open and own their own business normally investigate several opportunities before making an investment. As they consider various alternatives, they will inevitably meet with franchise organizations and receive the required and necessary franchise disclosure documents. Potential investors are thus generally aware that they should receive a package of legal documents, and if they don’t, the opportunity may not be the one they want to purchase.

Licensing

Licensing is an expansion vehicle that we believe is best used for a “process,” or a straight business opportunity.

Franchising exists when someone: 1) uses the name of an existing business, 2) pays money to the existing business ($500 or more), and 3) operates in a manner to some degree as prescribed by the existing business. Thus, in a very simple definition, name, payment, and control determine when a franchise exists.

So, in a licensing arrangement, one or more of these items has to be eliminated to avoid being subject to franchise law, and normally it is either “name” or “control.” Frequently people who think that they are expanding by licensing quickly and inadvertently develop a franchise program without even realizing it. Many of those who start expanding by licensing soon discover that they really want more control over the business operation of the licensee, and that franchising would be a better expansion vehicle.

Unless you are licensing something like a manufacturing process, franchising can possiblyl provide a much greater payoff, better control, a higher level of satisfaction, and a better exit strategy, than licensing.

Franchising

The advantages of franchising include: (1) Relative small capital requirement for expansion, (2) Less financial and legal liability in terms of lease and employee exposure, (3) Franchising is a format that has gained a great deal of acceptance and which is growing in popularity, and (4) When done properly, franchising is a proven and legal way to expand.

Franchising is a little more expensive, has specific legal requirements, and takes a few months longer to put together than some of the above expansion models. However, rather than thinking: “I want to expand. How can I do it and avoid franchising?,” we recommend that business owners work to develop a working franchise program and “get it right the first time.”

Franchising does not have to be difficult, nor does it have to be costly, although it is necessary to have a budget to initiate franchising.

We believe that franchising is a very good way, and perhaps the best way, for a successful business to expand regionally, nationally, and even internationally.

More information can be found at:  www.biltmorefranchise.com

 

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Article Tags: business opportunities, decade, downside, earnings, employee exposure, franchises, ftc rule, leases, legal partnership, liabilities, management decision, partner partners, partnership model, partnerships, payroll benefits, profits, rsquo



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