Growing a business usually requires an investment of time, money and people. But not every company that is looking to take the next step or that is hoping to expand has all three of those things in abundance. If you are hoping to expand into a new area or market, but don’t have the capital available to cover the full cost of renting a new location or the cost of hiring a new team to staff that location, franchising your business might be the way to go.
What Does It Mean to Franchise?
When you franchise a business, you enter into a partnership with another owner. As the initial owner of the company, you become the franchisor while the person or company you partner with is the franchisee. As the franchisor, you give the franchisee licensing rights to your business’ name, logos and other intellectual property. You also provide assistance with managing the franchise location and have some say in how the franchisee runs the business.
The franchisee usually pays you, the franchisor, an upfront fee as well as a monthly or annual fee for continued access to your company’s name and support.
What Are the Benefits of Franchising a Business?
Franchising offers benefits to both the company looking to franchise and to business owners who hope to buy a franchise. One of the biggest benefits for business owners is that franchising is a lot more cost-effective than opening an additional location on their own. There is also a bit less risk involved for the franchisor. If the franchised location doesn’t work out, the franchisee is the one responsible for the location’s lease and other expenses.
A benefit of becoming a franchisee rather than starting a company from scratch is that the franchise often already has an established reputation. For example, the owner of a popular coffee shop decides to franchise. The coffee shop already has a customer base and word has gotten out that it makes one of the best cappuccinos around. The franchisee is able to capitalize on that reputation, using it to help attract customers to the new location.
One other benefit of franchising for both franchisors and franchisees is that there is often strength in numbers. A coffee shop with multiple locations is going to need more cups, coffee and other supplies than a cafe with just one location. That means that the franchisees and original owner of the coffee shop can work together to negotiate contracts with vendors, often getting a better rate.
What Are the Drawbacks of Franchising a Business?
Franchising isn’t without its disadvantages, though, and it’s not necessarily the right option for every company. For example, companies that make the best franchises are companies that are easy to duplicate. These companies usually sell a product that’s easy to reproduce over and over — such as coffee, food or durable goods. Companies that rely on the personality of their owner might not franchise as well, as it’s difficult to reproduce the spark or sizzle of an appealing owner.
Another potential drawback of franchising your business is that doing so often requires you to shift roles or to hire someone to be responsible for managing franchisees. Someone needs to be in charge of finding eligible and capable franchisees and in charge of making sure that franchisees are holding up their ends of the contract. Often, franchising a business requires writing manuals and rule books and otherwise creating criteria for franchisees to follow. Some business owners find that they have a natural knack for playing the role of franchisors while others have difficulty with it.
One last potential drawback of franchising is that it can dilute your brand. For example, if a several franchise locations open up in the same general area, the customers who were previously going to the original location might start to go to one of the others. That means that sales can drop at the first location, affecting your bottom line. Depending on the amount of demand for what your company has to offer, franchising might not be the best way to grow.
Should your franchise your business? The team at New Direction Capital can review your options for growth and help you see whether franchising or another plan is right for you. To learn more, contact us today.
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