If you are a successful business owner, you might be wondering whether or not to consider franchising to open more locations and extend your reach. However, like every other business model, franchising comes with its advantages and disadvantages.
To know if franchising will be good for your company, you will need to weigh its pros and cons within the context of your business. While you require the assistance of a franchise lawyer or consultant to do that, it will be good to have an idea of the main benefits and drawbacks of franchising before consulting the experts.
Here are three key benefits of franchising to business owners looking to grow their operations:
1. Access to a bigger talent pool. Franchising enables you to find talented people to help you operate your outlets while offering incentives to encourage them to give their all. Most highly qualified individuals prefer managing a business in exchange for profits to collecting a salary from a company. Therefore, franchising allows you to get highly skilled people that will put in more hard work to grow the business than someone you hired to work for you.
2. Easy access to expansion capital: With franchising, it is also easy to get the money to expand your business. Since prospective franchisees will cover most of the start-up costs to join your system, you can easily increase the number of your business locations without investing much of your own capital or having to secure funding from moneylenders or angel investors.
3. Reduced growth risk. Another advantage of franchising is that it allows you to generate huge profits without much risk to you. As a franchisor, you will invest only a small amount of your own money to get new franchise locations, unlike when you are opening more company-owned outlets. If you have a successful business model, you can make a lot of money through royalties from sales at each franchise location. The profits you will receive can be way more than what you would have got if you set up and managed the outlets yourself.
Here are three key disadvantages of the franchise business model:
1. Less control over operators: As a franchisor, you cannot tell your franchise owners what to do as you can tell those working for you. Franchisees operate independently. Besides, their business goals are not the same as yours, which may result in a conflict and legal battle. Think about this: franchisors make most of their income by collecting a certain percentage of the franchisees’ sales as a royalty fee for allowing them to use their brand trademark and business system. On the other hand, franchisee generates their income from the outlet’s revenue. A conflict may arise if you ask your franchise operator to do anything that may increase sales but does not raise profits. For example, if you want to give customers promotional coupons, your franchise operator may not agree to it. While coupons can help the business make more sales, it does not always increase revenues, so offering them will benefit you (the franchisor) but not necessarily the franchise owner.
2. A weaker business community. Franchisors may also find it harder to get franchise operators to collaborate compared to store managers that they hired themselves. One franchisee’s effort to record more sales benefits the others. For example, some of your franchisees might want to stop paying for the marketing required to drive traffic to their location, knowing they are going to get customers anyway as long as other franchisors pay for advertising. If all the franchisees decide to follow suit, your sales may suffer because you did not advertise your business. While there are several ways to mitigate franchise free riding, they cost you money and need you to have your franchise contracts enforced in court.
3. Innovation challenges. Lastly, it is more difficult to innovate as a franchisor than if you are the owner of your business locations. As a franchisor, if you develop a new idea, you will need to persuade your franchisees to accept the new product(s) or the innovations you wish to introduce into the system rather than implementing the new idea yourself.
Those are the pros and cons you need to think about before consulting advisors about franchising your business. Franchising is not a perfect way to expand your business successfully. But it can be an excellent way to grow your operations when the benefits are way more than the drawbacks.
