THE 9 BENEFITS OF FRANCHISING
The main advantages for most businesses that enter franchising are capital, rapid growth, motivated management and reduced risk, but there are many more.
The most common barrier to expansion faced by small businesses today is lack of access to capital. Even before the credit crunch of 2008-2009 and the “new normal” that followed, entrepreneurs often found that their growth goals exceeded their ability to finance them.
Franchising, as an alternative form of capital acquisition, offers some advantages. The primary reason most entrepreneurs turn to franchising is that it allows them to grow without the risk of debt or the cost of equity. First, since the franchisee provides all the capital needed to open and operate a unit, it allows businesses to grow using the resources of others. By using other people’s money, the franchisor can grow unencumbered by debt.
In addition, because the franchisee – not the franchisor – signs the lease and enters into various contracts, franchising allows for expansion with virtually no potential liability, which greatly reduces the risk to the franchisor. This means that as a franchisor, not only do you need far less capital to expand, but your risk is largely limited to the capital you invest in developing your franchise company – an amount that is often less than the cost of opening an additional company-owned location.
2. Motivated management
Another stumbling block faced by many entrepreneurs looking to expand is finding and keeping good unit managers. Too often, a business owner spends months searching for and training a new manager, only to see him or her leave or, even worse, get hired by a competitor. In addition, the managers hired are just employees who may or may not have a real commitment to their work, making it difficult to supervise their work remotely.
But franchising allows the business owner to overcome these problems by replacing the manager with an owner. No one is more motivated than someone who is physically invested in the success of the operation. Your franchisee will be an owner – often with a lifetime of savings invested in the business. And his or her compensation will be largely in the form of profits.
The combination of these factors will have several positive effects on the unit’s performance.
Long-term commitment. Since the franchisee is invested, it will be difficult for him to withdraw from the business.
Higher quality management. As a long-term “manager,” your franchisee will continue to learn about the business and will be more likely to develop an institutional knowledge of your business that will make him or her a better operator as he or she spends years, or even decades, of his or her life in the business.
Operational quality improvement. While there are no specific studies to measure this variable, franchise operators generally take pride of ownership very seriously. They will keep their facilities cleaner and train their employees better because they own the business, not just manage it.
Innovation. Because they have a stake in the success of their business, franchisees are always looking for opportunities to improve their business – a trait most managers don’t share.
Franchisees generally perform better than managers. Over the years, studies and anecdotal evidence have confirmed that franchisees outperform managers in terms of revenue generation. In our experience, this performance improvement can be significant – often in the range of 10-30%.
3. Speed of growth
Most entrepreneurs who have developed something truly innovative have the same recurring nightmare: that someone else will beat them to market with their own concept. And often, these fears are based in reality.
The problem is that opening a single unit takes time. For some entrepreneurs, franchising may be the only way to secure a leading position in the market before competitors take over their space, as the franchisee takes care of most of these tasks. Franchising not only provides the franchisor with financial leverage, but also the ability to leverage human resources. Franchising allows companies to compete with much larger companies, allowing them to saturate markets before those companies can react.
4. Leverage on personnel
Le franchisage permet aux franchiseurs de fonctionner efficacement avec une organisation beaFranchising allows franchisors to operate efficiently with a much leaner organization. Since franchisees take on many responsibilities that would otherwise be handled by the company’s corporate office, franchisors can leverage these efforts to reduce overall personnel.
5. Ease of Supervision
From a management perspective, franchising also offers other advantages. First, the franchisor is not responsible for the day-to-day management of individual franchise units. At the micro level, this means that if a team leader or team member calls in sick in the middle of the night, they call your franchisee – not you – to let them know. And it’s the franchisee’s responsibility to find a replacement or cover for their team. And if he chooses to pay out-of-market salaries, employ his friends and family, or spend money on unnecessary or frivolous purchases, it won’t affect you or your financial performance. By eliminating these responsibilities, franchising allows you to focus your efforts on improving yourself.
6. Increased profitability
The leverage on personnel and ease of supervision mentioned above allows franchised organizations to operate very profitably. Because franchisors can rely on their franchisees for site selection, local marketing, recruiting, training, accounting, payroll and other human resource functions (to name a few), the franchisor’s organization is typically much leaner (and often relies on the organization already in place to support the business operations). The net result is that a franchised organization can be more profitable.
7. Improved valuations
The combination of faster growth, increased profitability and greater organizational leverage helps explain why franchisors are often valued at a higher multiple than other businesses. So when it comes time to sell your business, the fact that you are a successful franchisor that has established a scalable growth model can certainly be an advantage.
8. Secondary and tertiary market penetration
The ability of franchisees to improve financial performance at the unit level has important implications. A typical franchisee will not only be able to generate higher revenues than a manager in a similar location, but will also monitor expenses more closely. In addition, because the franchisee will likely have a different cost structure than you as a franchisor (may pay lower salaries, may not offer the same benefits, etc.), they can often operate a unit more profitably, even when factoring in the royalties they must pay you.
Of course, you should never consider a market that you don’t think offers a strong chance of success for the franchisee. But if your strategy is to develop business units in addition to franchising, you will probably find that your limited capital development budget will not allow you to open as many locations as you would like. Franchisees, on the other hand, might open and operate successfully in markets that are not among your development priorities.
9. Reduced risk
By its very nature, franchising also reduces the risk to the franchisor. Unless you choose to structure it differently (and few do), the franchisee is fully responsible for investing in the operation of the franchise, paying for any fixtures, purchasing any inventory, hiring any employees, and taking care of any working capital needed to start the business.
The franchisee is also the one who signs the lease agreements for the equipment, cars and physical location, and is responsible for what happens in the unit itself. This means that you are largely exempt from liability for employee disputes (e.g., sexual harassment, age discrimination, etc.), consumer disputes (the hot coffee spilled in your customer’s lap), or accidents that occur in your franchise (falls, workplace accidents, etc.).
In addition, it is very likely that your attorney and other advisors will suggest that you create a new legal entity to act as a franchisor. This will further limit your exposure. And because the cost of creating a franchise is often less than the cost of opening an additional location (or entering an additional market), your start-up risk is significantly reduced.
La combinaison de ces facteurs vous permet de réduire considérablement les risques. Les franchiseurs peuvent atteindre des centaines, voire des milliers d’unités avec un investissement limité et sans dépenser un The combination of these factors allows you to significantly reduce risk. Franchisors can achieve hundreds or even thousands of units with limited investment and without spending any of their own capital on unit expansion