Benefits

The primary advantages for most companies entering the realm of franchising are capital, speed of growth, motivated management, and risk reduction -- but there are many others as well.

1. Capital

The most common barrier to expansion faced by today’s small businesses is lack of access to capital. Even before the credit-tightening of 2008-2009 and the “new normal” that ensued, entrepreneurs often found that their growth goals outstripped their ability to fund 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 expand without the risk of debt or the cost of equity. First, since the franchisee provides all the capital required to open and operate a unit, it allows companies to grow using the resources of others. By using other people’s money, the franchisor can grow largely unfettered by debt.

Moreover, since the franchisee -- not the franchisor -- signs the lease and commits to various contracts, franchising allows for expansion with virtually no contingent liability, thus greatly reducing the risk to the franchisor. This means that as a franchisor, not only do you need far less capital with which 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 one additional company-owned location.

2. Motivated Management

Another stumbling block facing many entrepreneurs wanting to expand is finding and retaining good unit managers. All too often, a business owner spends months looking for and training a new manager, only to see them leave or, worse yet, get hired away by a competitor. And hired managers are only employees who may or may not have a genuine commitment to their jobs, which makes supervising their work from a distance a challenge.

But franchising allows the business owner to overcome these problems by substituting an owner for the manager. No one is more motivated than someone who is materially invested in the success of the operation. Your franchisee will be an owner -- often with his life’s savings invested in the business. And his compensation will come largely in the form of profits.

The combination of these factors will have several positive effects on unit level performance.

Long-term commitment Since the franchisee is invested, she will find it difficult to walk away from her business.

Better-quality management As a long-term “manager,” your franchi¬see will continue to learn about the business and is more likely to gain institu¬tional knowledge of your business that will make him a better oper¬ator as he spends years, maybe decades, of his life in the business.

Improved operational quality While there are no specific studies that measure this variable, franchise operators typically take the pride of ownership very seriously They will keep their locations cleaner and train their employees better because they own, not just manage, the business.

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 typically out-manage managers Franchisees will also keep a sharper eye on the expense side of the equation -- on labor costs, theft (by both employees and customers) and any other line item expenses that can be reduced.

Franchisees typically outperform managers Over the years, both studies and anecdotal information have confirmed that franchisees will outperform managers when it comes to revenue generation. Based on our experience, this performance improvement can be significant -- often in the range of 10 to 30 percent.

3. Speed of Growth

Every entrepreneur I've ever met who's developed something truly innovative has the same recurring nightmare: that someone else will beat them to the market with their own concept. And often these fears are based on reality.

The problem is that opening a single unit takes time. For some entrepreneurs, franchising may be the only way to ensure that they capture a market leadership position before competitors encroach on their space, because the franchisee performs most of these tasks. Franchising not only allows the franchisor financial leverage, but also allows it to leverage human resources as well. Franchising allows companies to compete with much larger businesses so they can saturate markets before these companies can respond.

4. Staffing Leverage

Franchising allows franchisors to function effectively with a much leaner organization. Since franchisees will assume many of the responsibilities otherwise shouldered by the corporate home office, franchisors can leverage these efforts to reduce overall staffing.

5. Increased Profitability

The staffing leverage and ease of supervision mentioned above allows franchise organizations to run in a highly profitable manner. Since franchisors can depend on their franchisees to undertake site selection, lease negotiation, local marketing, hiring, training, accounting, payroll, and other human resources functions (just to name a few), the franchisor’s organization is typically much leaner (and often leverages off the organization that's already in place to support company operations). So the net result is that a franchise organization can be more profitable.

Unfortunately, it is difficult to quantify or prove this contention. This much we do know: Research done during the past 10 years shows top quartile franchisors put an average of 40 and 45.6 percent to the bottom line in 2001 and 2002 respectively. How many industries can you think of where net incomes in this range are even possible?

6. Improved Valuations

The combination of faster growth, increased profitability, and increased organizational leverage helps account for the fact that franchisors are often valued at a higher multiple than other businesses. So when it comes time to sell your business, the fact that you're a successful franchisor that has established a scalable growth model could certainly be an advantage.

Marketing Support - Every franchise location uses the same tried and true marketing plans, which helps eliminate the costly guess work when starting an independent business. You will also have the power of a national and/or regional advertising fund.

Additional Sources of Revenue - As the franchisor, you will receive additional income in the form of on-going royalties paid by your franchisees, depending on your franchise agreement. Royalties typically include a monthly fee including a percentage of the franchisees gross sales.

Acquiring Talented Managers - The managers chosen to run each franchised location will have a vested interest in its success, unlike a salaried employee, and will be responsible for handling any issues related to employees, workers’ compensation, etc.

Scalability - Depending on your needs and goals, you can customize your franchise agreement to focus on large volume national growth or low volume regional growth.

Cost-Effective Expansion - Franchisees handle the research and funding for outlets in your chain, which means you do not have to spend your own capital or request additional funding from banks or investors in order to grow your business.

Increased Profitability - The staffing leverage and ease of supervision mentioned above allows franchise organizations to run in a highly profitable manner. Since franchisors can depend on their franchisees to undertake site selection, lease negotiation, local marketing, hiring, training, accounting, payroll, and other human resources functions (just to name a few), the franchisor’s organization is typically much leaner (and often leverages off the organization that's already in place to support company operations). So the net result is that a franchise organization can be more profitable.

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