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Most people are familiar with the benefits of franchising for franchisees—“be in business for yourself, but not by yourself!”—but what are they to you as an entrepreneur with an expanding business?
The first benefit is access to capital. To enter a new market, business owners would have to come up with the money themselves. With a franchised business, the business owner as franchisor is able to tap into however many streams of capital as it has franchisees. Yes, the franchisor still has some costs to pay for each new unit, but many of the costs will be incurred by the franchisees: real estate, equipment, fixtures, furnishings, inventory, working capital, etc.
Secondly, by franchising the franchisor is able to gain access to and market knowledge on a variety of areas. For example, below are some items a business owner would have to address before expanding to a new area. (Note: What follows is not a complete listing of concerns, simply an overview. Please consult the proper counsel before taking any kind of action.)
Area 1: Consumers
- Is there a large enough niche for your product/service in this locale?
- Do the potential consumers where you’re considering have the buying power necessary for your product/service?
Area 2: Differentiation
- Are there similar, local brands already operating in the area?
- What will make potential franchisees invest in your brand?
Area 3: Potential Risks (Mainly for International Expansion)
- Is the political situation stable?
- What is the current economic condition of the country (growing, stagnant, or declining)?
- Are there established protections for intellectual property?
- How are foreign businesses taxed?
Area 4: Culture
- Will you have to make adjustments to your product/service to fit the societal norms of the area?
- Can slight adjustments to your product/service be made economically?
While research could be done to obtain the answers to these questions, it would likely be very expensive and time-consuming. Partnering with other business owners via franchising helps franchisors gain insight into areas where a market might exist for their product or service, but they might not be familiar with.
Third, franchising also allows for the business to expand without spreading its top level managerial resources across too thin. Operating more than a few locations independently can drain not only one’s business resources, but mental and physical faculties as well. A franchise system allows for the day-to-day functions at locations to be handled by the franchisees, not the franchisor. Thus, the franchisor is able to focus on optimizing the business, supporting franchisees, and planning for the future.
In summary, by licensing out its business methods and pledging support to franchisees, the franchisor allows itself the opportunity to expand into areas it may have had difficulty expanding to without the extra money and manpower. However, with the advantages of expanding a business through franchising, it’s not without its disadvantages. Nor is it easily done.
Successful businesses with suitable concepts have failed to successfully franchise. Business owners must be honest with themselves about their goals, aspirations and capabilities before embarking on the franchise route. Even when businesses have met the criteria of having a replicable business model with expansion demand, prospective franchisors must be to ready to invest both money and time in the development and evolution of their franchise system. While it has its advantages, it is not a simple means to expansion.
If you’re ready to dive further into building a franchise system for your company, we have a number of franchise consultants listed on our Franchise Services page that can help.