Some businesses don’t want to expand by recruiting more staff and opening more offices because of the added costs, risks and responsibilities involved.
For these businesses, franchising can be a better alternative because franchises tend to be set up by entrepreneurs in locations near to the people that are demanding their products or services. This allows the business owner to focus on supporting the franchisees from one location and ensures that all their customers’ needs are met.
However, according to Carlos Garcia, the franchisor of Total Clean, franchising is not an easy way to grow your business.
What is franchising?
Franchising can be seen as a way of rapidly growing your business. It's a win-win situation as you can make money even when you're not working.
If someone wants to start their own business but doesn't have enough capital, franchising lets them do it usually for lower start-up costs. You'll help the franchisee with all the legal stuff like trademarks and brand development, as well as providing training materials that will get them up to speed quickly on how to run their own franchise operation. This reduces their risk significantly and lowers barriers for entry into the field of entrepreneurship!
In return for a franchisor fee, you give the franchisee the right to use your business's proven system to build more stores or businesses. A franchisor is responsible for the overall management of the franchise organization and can be held liable for any violations committed by its franchisees. As a franchisor you have several duties that include:
- Ensuring that all legal and financial requirements are met
- Developing a strong brand image and marketing strategy
- Creating ongoing training programs for employees
Keep reading to find out more about the pros and cons of franchising your business.
Summary of advantages and disadvantages for the franchisor
- Expansion can be faster because franchisees provide the labour and their sales provide the growth
- Franchisees are responsible for their company’s success, so they are more motivated
- Franchisees may be more talented at growing the business and turning a profit than employees would be
- The franchisor puts relatively little money into new locations as this comes from the franchisee
- Successful locations can return high royalties
- Consistent operations across the business generally means improved efficiency and higher quality levels
- Franchisees should be fully committed due to the investment they put in
- Franchisees cannot be managed as closely as employees and they may have different goals to the franchisor
- Franchise recruitment can be slower and less efficient than employee recruitment
- Franchisors earn royalties from sales; Franchisees earn money from profits. Achieving growth in both isn’t always possible, potentially causing conflict
- Franchisees don’t always work together like employees might, thus losing any potential collective benefit
- The upfront investment (time and money) required can be huge – a pilot operation may need to be tested
- Selecting one wrong franchisee can ruin the reputation of the whole franchise
- Sharing confidential information with franchisees is risky if they are not fully committed to the business
Advantages as a franchisor
1. Expansion can be faster because franchisees provide the labour, and their sales provide the growth
One of the biggest benefits of franchising is the speed in which it can occur. There’s no need for your business to grow organically, which means that you don’t have to wait years for a new store to open and begin generating revenue.
Instead, when you franchise your business, your growth depends on the efforts of others—your franchisees. By hiring them and taking a percentage of their sales, they provide both labour and growth in exchange for their share of profits. This arrangement also allows you to focus on other aspects of running your company while still gaining all those benefits associated with expansion: new customers, more market share, and higher profits overall.
2. Franchisees are responsible for their company’s success, so they are more motivated
A franchisee will have invested time, money and reputation in starting up the business.
This is an advantage because they will be more motivated to make sure that your business succeeds. It is likely that they will be committed to maintaining its high standards and helping it grow into a successful company.
3. Franchisees may be more talented at growing the business and turning a profit than employees would be
There are several reasons why you might choose to hire a franchisee over an employee. One of these is that in many cases, the franchisee will be more motivated than an employee to grow the business and turn a profit.
This isn't necessarily true for every single brand out there—some businesses require a lot more skill than others do—but most entrepreneurs who start their own businesses tend to have a stronger drive to succeed than employees.
4. The franchisor puts relatively little money into new locations as this comes from the franchisee
As a franchisor, you don't have to come up with the money or labour to open a new location. You provide the business model, training and ongoing support. The franchisee provides funding and human resources.
The fees paid by franchisees can be used by you to offset your costs in opening new locations and building out support systems such as marketing materials, accounting services and logistics software.
5. Successful locations can return high royalties
One of the benefits of franchising is that you can earn royalties. Royalties are a percentage of sales paid by a franchisee to you, the franchisor. It's important that you define what constitutes a “successful location” because otherwise the franchisee might end up paying out far more than if the business were just run on its own.
What this means is that if your store has high sales volume and profitability, it may be better off independently owned and operated without being part of a franchise system.
6. Consistent operations across the business generally means improved efficiency and higher quality levels
This can be achieved by a franchisor's training and support, which can help them to achieve consistency.
A franchisee is usually set up with a standardised business model, which means that they will be able to replicate the same level of operational performance as other outlets owned by your brand. The franchisor should provide ongoing training programmes for their franchisees so that they are able to keep up with industry standards and best practices in all areas of their business (for example, manual handling).
7. Franchisees should be fully committed due to the investment they put in
Disadvantages as a franchisor
1. Franchisees cannot be managed as closely as employees
Franchisees are not employees of the franchisor, but independent business owners. This means that you cannot manage them in the same way as you would an employee. The franchisee owns their own business, which is operated under your brand and your systems. The only thing that makes a franchisee part of your business is the fact that they pay for the use of your brand name and systems.
As such, it is important to remember that franchisees should be treated as business partners rather than employees.
2. Franchise recruitment can be slower and less efficient than employee recruitment
3. Franchisors earn royalties from sales; franchisees earn money from profits - potentially causing conflict
4. Franchisees don’t always work together like employees might, thus losing any potential collective benefit
5. The upfront investment (time and money) required can be huge
6. Selecting one wrong franchisee can ruin the reputation of the whole franchise
Selecting one wrong franchisee can ruin the reputation of the whole franchise. For example, if a franchisee is undercutting your prices and providing poor customer service, customers will associate this behaviour with every location in the franchise . In some cases, they might even take legal action against you for allowing such behaviour.
When you are selecting your franchisees, it is important that you consider the following factors:
- Commitment to the business: A good franchisee should be fully committed to the business and have a passion for what they do. They should also be willing to learn all aspects of running their own business in order to succeed.
- Financial stability: Having financial stability is an absolute necessity when franchising because this will ensure that your chosen franchisee can afford running their own store or location without any problems. If they don't have enough money, then chances are that your business won't do well either!
7. Sharing confidential information with franchisees is risky if they are not fully committed to the business
As you grow your franchise, it's crucial to keep all the information and trade secrets you have developed under wraps. Sharing this information with franchisees could give them an advantage over other locations in your franchise .
That said, if a franchisee is not fully committed to the success of your business, they may be unable to keep confidential information confidential. This loss of intellectual property can be devastating for both parties involved in franchising; therefore, it's best practice to create a robust franchise agreement that outlines every aspect of owning and operating a location within your system.
As you can see, franchising is not for everyone. It may be the right choice for your business, but it's not as simple as saying yes or no. If you're interested in becoming a franchisor, there are many factors to consider before making the plunge.
Looking at the advantages and disadvantages of franchising, we can see that it is a great option for companies who want to expand their businesses quickly. The risk is lower than starting from scratch with an independent location, but there are still some risks involved as well.
It’s important to make sure you do your research before committing any money into this type of business model so you can make informed decisions about whether it will work for your company.