To franchise, or not to franchise?

Have you built a successful company and are thinking about what to do next? Franchising is a proven way to expand your business. You don’t need us to tell you that some of the most well-known brands in the world have used this model to secure regional, state and international ascendency. But how do you know if this is right for you and your company? Let us explain the pros and cons as to why you might, or might not take the road to become a head franchisor.

Pros for businesses

Franchising has great cost benefits for someone who doesn’t want to invest a great amount of capital and time into the expansion of their company. In terms of cost benefits, franchisors stand to gain additional income streams in the form of remuneration by the franchisee. There is, of course, the initial fee which is the fundamental investment cost to unlock the door to the business. As well as the on-going franchise fee paid to the franchisor. Please note that these fees often vary depending on the business and contract agreements between franchisor and franchisee.

Beyond the investment and franchise payments, there are several other ways franchising your business can both grow your business while saving you money. By expanding distribution channels, a company can strengthen its position in the market, without the need of major investment. This is a good market signal for new and existing clientele in the scaling up of the franchisors name and trademarks.

A further cost benefit for the franchisor is the reduction of operating costs. Under the franchise agreements between franchisor and franchisee in the approved goods and services sold by the franchisee, the franchisor can strengthen relationships with their suppliers which can lead to further reduced costs.

Another common example is in advertising and marketing, where members of the franchise are usually obliged to make payments into a joint promotional and advertising fund. This will also help grow your market reach!

A major positive in franchising your business is the peace of mind of knowing who you are selling your company to. We find franchisees often are more involved owners when they invest their own money in becoming business owners. This also takes away the stress of hiring staff and human resource issues from the franchisor.

While leading the pack, franchisors do have a favorable safeguard against their franchisees. Franchisees are an independent entrepreneur in their own right. They therefore bear responsibility for their own actions. Thus legally, the franchisor is exempt for any wrong doing or claims against any subsidiary franchises.

Cons to consider

On the flip-side, poor business behavior by the franchisee can affect overall brand health. Quality guidelines for new business owners shall be contained in the franchise package provided to franchisees during the set-up phase. The risk must be noted that it can be hard to enforce strict regulations to those who fail or simply do not want to abide by the book, which could have an impact on your business.

A secondary risk is a diminishing franchise fee. As this fee is often pegged to profit as opposed to sales – it’s important to be wary some business owners will try and lower the amount of profit which leads to a reduction in the franchisor’s remuneration.

Our final risk to consider is the threat of creating a future competitor. Successful franchisees who grow to understand the business and the market using the system, may tire of paying out franchise fees, and want to be independent. This is why most franchise agreements contain a non-compete clause for a set period of time on the franchisee and other participants. This clause is subject to assessment from anti-trust legislation and at best only postpones the potential future undertaking of competitive activity.