SME owners often consider whether franchising would be a quick and simple way of expanding their business. In some cases franchising may be the answer, however not every business is suitable to be franchised and more importantly not every business owner fits the franchising model.
A well planned and implemented franchise model can expand a healthy local business into a global thriving brand.
Like any business model, franchising has its benefits and drawbacks. Knowing what these are will enable you to decide if franchising is a suitable option for your business.
Advantages of Franchising your Business
Grow your Business
Franchising your business can be a cost-effective way to grow the business as the franchisee and not you will be the one responsible for funding the cost of setting up the new location.
While the franchisee collects all the future trading income, you will receive franchise fees and royalties or a mark-up on products sold by the franchisee.
The more successful franchisees you have the better known and more valuable your brand becomes.
Easier Management
The franchisees run their own businesses and in this way reduce the management demands that you would incur if you were to open and manage another unit yourself.
You may also be getting access to better talent who will work harder to build the business than you would by hiring someone to work for you as an employee.
Franchisees are likely to be more motivated than a manager as they have a vested interest in the success of their business and therefore in the success of your brand.
Purchasing Power
A larger franchise chain can lead to increased buying power from suppliers. This will not only improve the competitiveness of all the franchisees in their market, it should lead to increased sales and market share.
Disadvantages of Franchising your Business
Not a Fix for a Failing Business
Franchising is not a solution to a failing business or a business that is in urgent need of a capital injection. You should only go down the franchise route if you already have a successful business up and running.
Costs / Time
Setting up the franchising model takes a significant amount of time and cost at the outset. This may involve preparing operating models, marketing materials and standard legal documentation.
You will also have to take the time to ensure you attract the right franchisees and control what they do.
To be a successful franchisor you will need to have all the systems and procedures in place that can be copied by most people to run a successful business before you begin to offer up your first franchise opportunity.
Less Control over Managers
Franchisees are independent businesses and therefore you can’t treat them the same as an employee.
You also have less control and visibility over the performance of the franchise. Most franchise fee models are calculated based on a percentage of the franchisee’s sales. If the sales are under-reported then the franchise fee will be affected.
Territorial Protection
Most franchisees will request an undertaking from you that no one else will be offered a franchise within a certain radius of their premises. While this may sound reasonable, it limits the expansion of the franchise in larger density areas where demand would warrant more units. It also possibly leaves the opportunity for competitors to enter the market.
How We Can Help
Shane Carroll is our Director of Business Advisory Services. He has worked with both a number of franchisors and franchisees across a wide variety of sectors in evaluating the business opportunity.
