If growth is your goal — and it should be if you’re a motivated entrepreneur — franchising offers some of the greatest benefits of any expansion strategy.
Maybe your motivation for growth is to create opportunities for others. Perhaps it’s to build a legacy that lasts beyond your lifetime. Some entrepreneurs do it purely out of opportunism or because they enjoy the challenge of building a business. In most cases, it’s a combination of these things. Whatever your reason, here are four advantages of franchising to consider before deciding if it’s the right move for your business.
- You don’t need as much capital.
A lack of capital is one of the most common barriers to business expansion as entrepreneurs often find their available funds far outstripped by their growth goals.
Taking on debt — from banks, leasing companies, private investors, sometimes even friends and relatives — is a huge barrier for business owners looking to grow. High interest rates can cause payments to spiral out of control and bank loans are often difficult to come by — especially in amounts that are adequate to fuel aggressive growth.
Unlike the “go-go” days before the Great Recession, banks today often will not lend even in situations when they’re fully secured. Franchising offers an alternative that allows entrepreneurs to expand their business without the cost of equity. The franchisee provides the capital needed to open and operate a unit, allowing the franchisor to grow without incurring debt or giving up equity.
But, don’t think franchising will come at no cost. Outside of what you’ll need to spend on marketing the opportunity to qualified investors, as a franchisor you need to budget for costs in a number of areas including business planning, financial analysis, legal documentation and training — not to mention accounting for the additional staff you’ll need to support the influx of franchisees.
- You’ll have extremely motivated management.
Entrepreneurs often stumble when recruiting and retaining high-quality unit managers. It’s not uncommon for a business owner to spend months finding and training supervisory employees, only to see them move on after less than a year. Furthermore, hired managers are still only employees. They may or may not be genuinely committed to their jobs, which means it’s important to closely supervise their work. This can be a challenge as a hands-off operator.
Franchising, however, can help eliminate this problem. No one is more motivated than a person who has invested their life savings into a business. Their livelihood depends upon the success of the business, even more than you depend on them.
Owner-operators embody several factors that impact unit-level performance:
- Long-term commitment: Franchisees are invested, financially and emotionally. Most franchise contracts, which the franchisees will sign, commit them to your business for decades.
- Quality: As long-term operators whose livelihood depends on the success of the business, franchisees are motivated to continuously learn about the business and the industry. And often, the caliber of experience from people interested in buying a business is significantly above that of the “typical” manager.
- Improved operations: Franchise operators take pride in ownership. They keep their locations cleaner and train their employees better because they are owners, not just managers. Franchisees also keep a sharper eye on expenses, continuously looking for ways they can reduce labor and other costs.
- You can promote growth quickly.
Most entrepreneurs I’ve met have the same fear: that someone will beat them to market with their own concept. The business world moves so fast that those fears are not without merit. Unfortunately, it takes time to open a single unit. Depending on the nature of the business, you may need to hunt for appropriate sites, negotiate leases, assist with location build-out, research the local market, arrange vendor relations and more.
Even with adequate capital, unit growth is still limited based on an entrepreneur’s ability to support that growth. Franchising may be the only strategy for some entrepreneurs to secure leadership in the market. Franchising allows companies to compete with much larger businesses and saturate markets before their competitors can respond.
- You can reduce risk.
Because your franchisees hold the responsibility for their franchise operation, franchising can significantly reduce the risk to you as a franchisor. Since the franchisee is responsible for the entire startup investment (including purchasing inventory, hiring talent, paying for build-outs and fronting any working capital) you can focus on growth without the unit level risk incurred by your franchisee.
In addition to all the start-up responsibilities, franchisees are also responsible for activities within the unit itself. As long as the franchisor is careful to clearly define where the franchisee’s responsibilities lie, franchising can also minimize the risk of potential litigation that might, at the unit level, include things like sexual harassment, discrimination or slip-and-fall lawsuits.
With limited risk though, comes limited control. A franchisor will not have the ability to hire, fire, supervise and discipline the franchisee’s employees. Instead, they can only mandate that the franchisee follow brand standards — and leave it to them to develop the team to meet those standards.
When franchisees start to join the system, it can often be a jarring experience for the franchisor that is no longer in complete control of every aspect of day-to-day operations. Comprehensive operations manuals, regular site visits and clear operational systems and processes are absolutely critical and must be developed and established ahead of launching a franchise program — often at significant cost.
So while franchising is a great growth vehicle for some, it is not always the right vehicle for everyone, despite its advantages. Consider these things closely when determining if franchising is right for you.