Advantages of Franchising

Advantages of Franchising

The dominant advantages for most businesses wanting to go into into franchising are capital, speed of growth, motivated management, and risk reduction — but there are many others in addition.

1. Capital

The most shared obstacle to expansion faced by today’s small businesses is without of access to capital. already before the credit-tightening caused by the last recession, entrepreneurs often found that their growth goals surpassed their ability to fund them.

Franchising, as an different form of capital acquirement, offers some advantages. The dominant reason most entrepreneurs turn to franchising is that it allows them to expand without the danger of debt or the cost of equity. The franchisee provides all the capital required to open and function 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. consequently there is a much lower investment for a franchisor in building the business except 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 consequently are more likely to keep.

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 aim 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 enhance their business unlike managers.

Franchisees are usually more concerned about saving money by 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 responsibilities. Franchising not only allows the franchisor financial leverage, but also allows it to leverage human resources in addition. 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 method 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, use their friends and relatives, or use 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 attempt site selection, lease negotiation, local marketing, hiring, training, accounting, payroll, and other human resources roles, the franchisor’s organization is typically much leaner. The net consequence is that a franchise organization can be more profitable.

7. Improved Valuations

The combination of faster growth, increased profitability, and increased organizational control helps explain 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 form could certainly be an advantage.

8. Penetration of Secondary and Tertiary Markets

The capacity of franchisees to enhance 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 function a unit more profitably already after accounting for the royalties paid to you.

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