The Advantages Of Franchising A Business
While your interest in franchising is from the perspective of a potential franchise owner, you will find it useful to look at the franchising equation from the franchisor’s point of view. After all, partners in a business deal each must benefit, and it makes sense for you to understand the franchisor’s motivation.
Why do companies look to franchising their businesses in the first place? Many businesses want to or need to grow and open additional locations to capture valuable market share. Increased market share can lead to greater profitability, as a result of increased sales. But the costs of growing a business can be significant, indeed.
Take a simple example of a fast food, limited-menu business. The owners of the business want to open five new locations, in twenty new cities, over the course of the next five years. This would equal 100 new locations in five years. Considering the costs, to open a typical, single location is approximately $200,000, the company would have to be prepared to invest more than $20 million and that is only the development costs and does not include advertising, recruiting and marketing. Just where is this company going to get the type of operating capital needed for this expansion plan? With large working capital loans and initial public offerings becoming more difficult and costly to obtain, more companies are searching for a more low-cost, effective, alternative means of expansion.
Franchising is the answer for many of these businesses. Franchising transfers many of the start-up costs associated with opening a new location to the individual franchise owner. Under a franchise relationship, the franchisee incurs the initial costs for construction, remodeling, equipment, grand opening, advertising, training, salaries and other related costs. The franchisor doesn’t have to fund the growth itself.
The franchisor, however, using its proven method of operation, teaches and shares its successes with the franchisees and helps to manage the expansion. This means, with a properly structured franchise, expansion and growth can be accelerated and even be explosive.
There are many other reasons why businesses franchise. Under a franchise arrangement, both parties, the franchisee and the franchisor, benefit from one another. Franchisees gain valuable experience, insight and education from the franchisor. The franchisor gains motivated management. . . self employed franchisees who are willing to invest the time, energy and capital it takes to make a business successful.
This “cooperative” relationship builds a win/win situation for everyone involved. It forges a strong strategic partnership between franchisees and the franchisor. It provides the incentives that each party needs to contribute to the other’s potential success.
In sum, companies chose franchising because they:
- Need to or want to grow but do not have sufficient money or the ability or desire to borrow or raise the money;
- Even if they had the money they don’t have qualified people to run the locations;
- They can expand and penetrate markets and grow faster with motivated people (franchisees).
Franchising, as an expansion tool, has an extremely bright future. Growing numbers of companies are turning to franchising to market their goods and services. Small companies find working with franchisees really helps them respond more quickly to changing market conditions and is a better way of attracting greater patronage. Large corporations find that franchising helps them meet increased competition for market share by enhancing their distribution channels while reducing their operating overhead at the same time.
