June 17, 2024


Marsh Gas

Advantages of Franchising

The primary advantages for most businesses wanting to enter into 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 caused by the last recession, entrepreneurs often found that their growth goals exceeded their ability to fund them.
Franchising, as an alternative form of capital acquirement, offers some advantages. The primary reason most entrepreneurs turn to franchising is that it allows them to expand without the hazard of debt or the cost of equity. The franchisee provides all the capital required to open and operate a unit which allows companies to grow using the resources of others. By using other people’s money, the franchisor can grow largely free of debt.

A franchisee is the one who invests funds to run the franchise, not the franchisor. Therefore there is a much lower investment for a franchisor in building the business apart from the costs to start the franchise.

2. Motivated Management
Many entrepreneurs seeking to expand their business to another location requires hiring and training managers who can properly run the business. Managers are rarely vested in the business and can easily be recruited by the 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 are more likely to remain.

Long-term commitment. Franchisees find it more difficult to walk away from a business in which they have invested a large amount of money and time.
Better-quality management. Unlike managers, franchisees are long term “managers” and they 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 into the future.
Improved operational quality. Franchisees typically take more pride in their ownership than managers. They will keep their locations cleaner and train their employees better. They also have more concern about the clients they serve as they have a stake in the satisfaction of the client.
Innovation. Franchisees are more inclined to seek opportunities to improve their business unlike managers.
Franchisees are usually more concerned about saving money through controlling expense.

3. Speed of Growth
For some entrepreneurs, franchising may be the only way to make certain that they capture a market leadership position before competitors infringe 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 efficiently 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. 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 calls in sick in the middle of the night, they’re calling your franchisee — not you — to let them know. It’s the franchisee’s responsibility to find a substitute or cover their shift. If the franchisee chooses to pay salaries that aren’t in line with the marketplace, employ their friends and relatives, or spend money on unnecessary or frivolous purchases, it won’t impact you or your financial returns. By eliminating these responsibilities, franchising allows you to direct your efforts toward improving the big picture.

6. Increased Profitability
The staffing leverage and ease of supervision stated herein 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, the franchisor’s organization is typically much leaner. The net result is that a franchise organization can be more profitable.

7. Improved Valuations
The combination of faster growth, increased profitability, and increased organizational control helps account for the fact that franchisors are often valued at a higher multiple than other businesses. If you decide to sell your business, the fact that you’re a successful franchisor that has established a scalable growth model could certainly be an advantage.

8. Penetration of Secondary and Tertiary Markets
The capacity of franchisees to improve unit-level financial execution has some serious implications. A typical franchisee will not only be able to generate higher revenues than a manager in a similar location but will also keep a closer eye on expenses. Generally a franchisee will have a different cost structure than you do as a franchisor; the franchisee can often operate a unit more profitably even after accounting for the royalties paid to you.