The Advantages of Franchising

Oct 08, 2018

The primary advantages for most companies entering the realm of franchising are capital, the speed of growth, motivated management, and risk reduction. Did you know there are many others as well?

 

Capital: The most common barrier faced by today’s small businesses is lack of access to capital. Entrepreneurs often find that their growth goals exceeded their ability to fund them.

 

The main reason most entrepreneurs turn to a franchise as it allows them to expand without the risk of debt or the cost of equity. A franchise provides the entire capital required to open and operate a unit. It allows companies to grow using the resources from others. By using other people’s money, a franchisor can grow largely unconfined by debt.

 

Since the franchisee signs the lease and commits to various contracts, franchising promotes expansion with virtually no contingent liability reducing the risk to the franchisor to a great extent. As a franchisor, your risk is largely limited to the capital you invest in developing your franchise company.

 

Motivated Management: Many entrepreneurs wanting to expand have trouble finding and retaining good unit managers. Often, a business owner spends months looking for and training a new manager. However, situations get worse when they leave or get hired away by a competitor.

 

Speed of Growth: Every entrepreneur who’s developed something truly innovative has the same worry; that someone else will beat them to the market with their own concept. These fears are often based on reality. The problem is opening a single unit takes time. For some entrepreneurs, franchising may be the only way to ensure that they capture a market. Franchising not only allows the franchisor financial leverage but also allows to leverage human resources as well. Franchising allows companies to compete with much larger businesses so they can saturate markets before these companies can respond.

 

Staffing Leverage: Franchising allows franchisors to function effectively with a leaner organization. Since franchisees assume many of the responsibilities shouldered by the corporate home office, franchisors can leverage these efforts to reduce overall staffing.

 

Ease of Supervision: Franchising provides other advantages as well. The franchisor is not responsible for day-to-day management of the individual franchise units. At a small-scale level, this means if a shift leader or crew member calls in sick in the middle of the night, they’re calling your franchise and it’s the franchisee’s responsibility to find a replacement or cover their shift. If they choose to pay salaries that aren’t in line with the marketplace or employ their friends and relatives or spend money on unnecessary purchases, it won’t impact you or your financial returns. By eliminating these responsibilities, franchising allows you to direct your efforts toward growing your business.

 

Increased Profitability: Staffing leverage and ease of supervision allow franchise organizations to run in a highly profitable manner. Since franchisors can depend on their franchisees to undertake site selection, lease negotiation, local marketing, hiring, training, accounting, payroll, and other human resources functions, the franchisor’s organization is typically much leaner. Hence the net result is that a franchise organization can be more profitable.

 

Improved Valuations: The combination of faster growth, increased profitability, and increased organizational leverage help account for the fact that franchisors are often valued at a higher multiple than other businesses. So, when it comes time to sell your business, the fact that you’re a successful franchisor that has established a scalable growth model could certainly be an advantage.

 

Reduced Risk: Franchising also reduces the risk for the franchisor. The franchise has all the responsibility for the investment in the franchise operation, paying for any build-out, purchasing any inventory, hiring any employees, and taking responsibility for any working capital needed to establish the business.

 

The franchise is also the one who executes leases for equipment, autos, and the physical location, and has the liability for what happens within the unit itself. That way you are not liable for employee litigation, consumer litigation, or accidents that occur in your franchise.

 

The combination of these factors provides you with substantially reduced risk. Franchisors can grow to hundreds or even thousands of units with limited investment and without spending any of their own capital on unit expansion.

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