Franchising Your Business :The Pros and Cons of Franchising

While franchising provides franchisees with a proven system and the support of a much larger organization, the advantages to the franchisor are even more significant.

Capital to buy a franchise

Since franchisees use their own capital, the franchisor has virtually no investment at the unit level. Franchising allows companies to leverage off the assets of franchisees.

Return on Investment of a franchise

Because of this lower investment, ROI will be significantly higher.

Risk Reduction

With no capital invested in units, risk is reduced substantially.

Limited Contingent Liability

The franchisor will not be signing leases, taking on financing, etc., and will thus expand with limited contingent liability.

Speed of Growth

By leveraging off of the time and efforts of its franchisees, a franchisor can grow much faster without adding staff.

Reduced Role in Day-to-Day Operations

As a franchisor, your primary concern involves the franchisee’s top line performance, reducing the scope of your involvement in day-to-day management.

Reduced Vicarious Liability

The liability for acts of employees (e.g., sexual harassment, EEOC violations, etc.) and for occurrences in the unit (e.g., slip-and-fall) accrues to the franchisee, not the franchisor, for the most part.

Highly Motivated Management

Franchising can provide a company with highly motivated management who will treat individual units as its own.

Quality Control

Franchisees generally keep their units in better operational shape than unit managers and, as a part of the community, are better able to promote these units locally.

Long-Term Management

The franchisor can invest in the long-term training of its franchisees, as they are unlikely to leave short-term.

Unit Performance

Units are generally better run, as is reflected in the fact that franchised stores generally outperform company-owned stores in terms of sales volume.

Lean Structure

Franchisors can grow the organization without adding significantly to overhead.

Brand Building

This ability to grow the organization without substantial additions to overhead will allow franchisors to grow their retail presence and their brand more quickly and effectively.

Advertising

Franchisees will often contribute to a common advertising and promotional fund. This fund will be used to promote the brand under the direction of the franchisor.

International

International expansion becomes easier, faster, and carries far less risk since a local partner becomes involved.

Moreover, it is important to note that franchising is not an exclusive strategy. Most franchisors use it in conjunction with company-owned growth to compound growth.

Offsetting these positives are three major disadvantages of the franchising business model:

Less control over managers. You can’t tell franchisees what to do the way you can with employees. Franchisees are independent businesses. Moreover, they have different goals from yours, which can easily conflict and even lead to legal trouble. Consider the classic example: Franchisors make money by collecting a percentage of sales as a royalty for letting the franchisee use their brand name and operating system. Franchisees make money from the outlet’s profits. Anything that boosts sales, but not profits will create conflict between you and the franchisee. If you want to offer customers promotional coupons, franchisees may likely object. Coupons boost sales, but not always profits, benefitting the franchisor, but not necessarily the franchisee.

A weaker core community. It’s more difficult to get franchisees as opposed to hired store managers to work together. Franchisees have an incentive to profit from each other’s efforts to generate business. For instance, your franchisees might try to get out of paying for the advertising needed to attract customers, figuring they will get the customers anyway if other franchisees buy the advertising. Of course, if all of them do the same thing, you end up with no customers because you’ve got no advertising. There are ways of minimizing franchisee free riding, of course, but those cost money and require enforcing your franchisee contracts in court.

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