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Franchising your business

Written by: Diarmuid Kieran

Article Overview: Franchising your business as a method of business expansion

Franchising your business

The benefits of franchising as a means of expanding a business are twofold. One, it involves low capital investment by the franchisor as the capital used to expand the network comes from franchisees. Two, by franchising the business, the franchisor places the expansion of his/her business in the hands of people who are motivated to make it work. Having invested what in many cases are their life savings in a franchise, franchisees will strive to make the business successful. Their livelihood depends on it.

By using the franchisees' capital, the franchisor is able to establish a large number of outlets in a short period of time. Rapid expansion can be achieved without incurring the overheads and costs associated with opening company-owned outlets. This brings benefit to both the franchisor and franchisee as it helps build consumer recognition quickly and establish the franchise.

The cost of expansion for the franchisor is usually limited to the cost of franchisee recruitment, training and assistance prior to opening. Franchisees invest their own equity and borrowed funds in premises, equipment, fixtures, furnishings, inventory and the working capital necessary to establish a franchise unit. The only cost to the franchisor is that of the overheads not met by the franchisee's initial franchise fee.

The return on investment is much higher for businesses who expand through franchising. Because there is less capital employed, the franchisor's profits are generated on a much lower capital investment. Although the revenue from franchised units is less than that received from company-owned outlets, a higher percentage of the revenue is profit.

Franchising also allows for the business to expand without spreading managerial resources across too many business units. A business owner may wish to keep his/her own operation small and tightly run. Operating more than a few outlets can drain business resources. A franchise system requires less management than a company owned chain of outlets. Hiring, training, motivating and retaining competent staff are all functions handled by the franchisee, not the franchisor.

Businesses choose franchising as a means of expanding their enterprise because of the ambition and energy of owner operators and sometimes - especially in the case of small, one-person enterprises - because the service provided by the franchise is very demanding and needs the extra attention of an owner manager. The owner manager is usually more motivated and effective than a salaried manager because he or she has a vested interest in the business.

Franchising has added attraction for expanding a business into foreign markets particularly those that are different, as most foreign markets are, to the franchisor's home market. By using indigenous franchisees, the franchisor is tapping into local business knowledge which may prove beyond his or her capability to obtain otherwise. People who know the local scene well deal with legal and cultural differences more easily than an overseas company executive would.

Whatever the advantages of expanding a business through franchising, it is not without its disadvantages. Nor is it easily done. Successful businesses with franchisable concepts have failed to successfully franchise. Companies must meet certain criteria before embarking on the franchise route. Even when they have met those criteria, prospective franchisors must be to ready to invest both money and time in the development of the franchise system. While it has its advantages, it is not a simple means to expansion.

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Related Forum Posts
Re: Re Franchise etc - [quote="bmueller47":e0j0nu4t]Can you see a shift of various types of franchises? What I am thinking about is that today it is more difficult to create franchises, that has great appeal. More and more people want to have their business, but no interference of someone else.[/quote:e0j0nu4t] Not sure what you mean exactly but it is certain that more and more people want to have their own business but not more and more people know what they really want to do, or how to do it. And that's what franchising is all about. Franchising is not for an entrepreneur. An entrepreneur will do his own thing. People who buy franchises want a turn key business, with a proven model. Franchising in the US had never been that good. I don't have the exact numbers in mind but I know for sure that franchising is growing more and more as people are getting more and more aware of this business model.
Re: Franchiser Bankruptcies: 3 Tips on Being Prepared - Diversification is essential to a successful portfolio. I think it is essential in all sectors and industries. Franchising is no different. Excellent points on preparation! All entrepreneurs should use these 3 guiding principles for every aspect of their business career.
Franchising vs. Licensing? - What is your opinion on Franchising vs. Licensing? Which is better?
Nominations for a new Franchising Moderator! - Is there anyone you'd like to nominate as our Franchising Moderator (or volunteers for the position)?
Great Article, chock full of info. - Ian, Thank you for linking your article regarding Licensing vs Franchising. Its a good read.


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