When an independent business proves itself successful, and poised to grow even more, it is only natural to think about expansion. Franchising is a logical means to achieve that expansion and offers several advantages.
Franchising though is not an automatic step to success. First of all, the potential franchisor has to have a proven concept that can be duplicated over and over again. Perspective franchisees are going to carefully scrutinize the business operations, profit and loss statements, and the market potential and competition before investing. A new business with a short history is going to be a harder sell than one with a long established track record of success.
The first and most obvious benefit of franchising a business is that the owner/franchisor can leverage other peoples’ money – the franchisees’ investments – to grow the business. Instead of borrowing money to obtain other locations, buy supplies, hire and train more staff, the franchisor focuses on recruiting qualified franchisees. Of course, the franchisor does have initial costs to cover – recruitment advertising and screening, training, legal fees, creating an Operations Manual and setting up an operational support system.
Finding good prospective franchisees will take considerable time and effort too. Each has to be screened regarding their business experience and financial status to ensure they are qualified. Though many potential franchisees may want to invest, only a select few will actually make the grade.
Once franchisees are recruited, they are highly motivated to make their businesses successful. Unlike paid employees, franchisees are driven to reach financial goals and profitability as quickly as possible. The franchisor reaps immediate returns in the forms of royalties and other fees. Though these revenues are only a small percentage of each franchise unit’s gross income, the profit margin for the franchisor is typically much higher than the net profit margin achieved in the franchisor’s original single unit business. And the revenues are recurring, building multiple streams of income as each new franchise unit begins operating.
By franchising the business, the owner reduces the need to constantly find, pay and retain good employees. The franchisor bypasses many of the complicated regulations that govern employer/employee relations.
A franchised business also offers the advantage of brand recognition. This helps to build a base of loyal customers, who know they can rely on the consistency and quality of products and services offered.