Capital, speed of growth, motivated management, and risk reduction are the main advantages for most businesses wanting to enter franchises, but there are many others as well.
1. Capital
The most common barrier to expansion faced by today’s small businesses is a lack of access to capital. Even before the credit crunch caused by the last recession, entrepreneurs often found that their growth targets exceeded their ability to finance them.
The franchise, as an alternative form of capital acquisition, offers some advantages. The main reason most entrepreneurs turn to franchises is that it allows them to expand without the risk of going into debt or the cost of capital. The franchisee provides all the capital necessary to open and operate a unit that allows businesses to grow using the resources of others. By using other people’s money, the franchisor can grow largely debt free.
A franchisee is the one who invests funds to run the franchise, not the franchisor. Therefore, there is much less investment for a franchisor in building the business, in addition to the costs to start the franchise.
2. Motivated management
Many entrepreneurs looking to expand their business to another location require hiring and training managers who can properly run the business. Managers are rarely conferred on the business and can easily be recruited by competition. In franchising, an owner is vested in the business due to the requirement to use capital to become a franchisee. These owners are more loyal to the business and therefore more likely to stay.
Long-term commitment. Franchisees find it more difficult to walk away from a business in which they have invested a great deal of money and time.
Better quality management. Unlike managers, franchisees are long-term “managers” and continue to learn about the business and are more likely to gain institutional knowledge that will make that person a better operator for many years to come.
Improved operational quality. Franchisees generally take more pride in their property than managers. They will keep their locations cleaner and train their employees better. They also care more about the customers they serve as they have an interest in customer satisfaction.
Innovation. Franchisees are more inclined to seek opportunities to improve their business than managers.
Franchisees are often more concerned with saving money by controlling expenses.
3. Growth speed
For some entrepreneurs, franchising may be the only way to ensure they capture a leadership position in the market before competitors infringe on their space, because the franchisee performs most of these tasks. The franchise not only allows the franchisor financial leverage, but also allows you to take advantage of human resources. Franchises allow companies to compete with much larger companies so that they can saturate markets before these companies can respond.
4. Leverage of staffing
Franchising allows franchisors to function efficiently with a much more agile organization. Since franchisees will take on many of the responsibilities that corporate headquarters would otherwise have, franchisors can take advantage of these efforts to reduce overall staffing.
5. Ease of supervision
The franchisor is not responsible for the day-to-day management of the individual franchise units. At a micro level, this means that if a shift leader or crew member reports sick in the middle of the night, they are calling their franchisee, not you, to let them know. It is the responsibility of the franchisee to find a replacement or cover his shift. If the franchisee chooses to pay wages that are not in line with the market, employ your friends and relatives, or spend money on unnecessary or frivolous purchases, it will not affect you or your financial performance. By eliminating these responsibilities, it grants you a franchise to direct your efforts toward improving the big picture.
6. Higher profitability
The staff leverage and ease of supervision established here allow franchise organizations to operate in a highly profitable manner. Since franchisors can rely on their franchisees to perform site selection, lease negotiation, local marketing, recruiting, training, accounting, payroll, and other human resource functions, the franchisor organization is often very more agile. The net result is that a franchise organization can be more profitable.
7. Improved ratings
The combination of faster growth, higher profitability, and greater organizational control helps explain the fact that franchisors are often priced at a higher multiple than other businesses. If you decide to sell your business, the fact that you are a successful franchisor that has established a scalable growth model could certainly be an asset.
8. Penetration of secondary and tertiary markets
The ability of franchisees to improve financial execution at the unit level has some serious implications. Not only will a typical franchisee be able to generate higher income than a manager in a similar location, but they will also be able to more closely control expenses. Generally, a franchisee will have a different cost structure than you have as a franchisor; the franchisee can often operate a unit more profitably even after accounting for the royalties paid to him.